Laramie Labs Uses a Risk-Adjustment When Evaluating Projects of Different

question 26

Multiple Choice

Laramie Labs uses a risk-adjustment when evaluating projects of different risk.Its overall (composite) WACC is 10%,which reflects the cost of capital for its average asset.Its assets vary widely in risk,and Laramie evaluates low-risk projects with a WACC of 8%,average-risk projects at 10%,and high-risk projects at 12%.The company is considering the following projects: $$\begin{array} { c c c } \underline{\text { Project }} &\underline{ \text { Risk }} &\underline{ \text { Expected Return }} \\\text { A } & \text { High } & 15 \% \\\text { B } & \text { Average } & 12 \% \\\text { C } & \text { High } & 11 \% \\\text { D } & \text { Low } & 9 \% \\\text { E } & \text { Low } & 6 \%\end{array}$$ Which set of projects would maximize shareholder wealth?

• A)A and B.
• B)A, B, and C.
• C)A, B, and D.
• D)A, B, C, and D.
• E)A, B, C, D, and E.

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Definitions:

Job Order

A custom or production order that specifies the details for manufacturing a certain product or products for a customer.

Process Cost

The cost associated with a production process, allocated to products based on the process they go through rather than being directly traced to the product itself.

Conversion Costs

Conversion costs are the costs incurred to convert raw materials into finished products, including direct labor and manufacturing overhead.

Direct Labor

The labor costs directly associated with the manufacture of specific goods or services, which can be easily traced to a product.