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:

Acid Test Ratio

A liquidity metric that measures a company's capability to cover short-term liabilities with assets easily convertible to cash.

Accounts Receivable

The money owed to a company by its customers for goods or services that have been delivered but not yet paid for.

Net Sales

Net sales is the revenue a company generates from its sales of goods or services after deducting returns, allowances for damaged or missing goods, and discounts.

Ending Inventory

The total value of goods available for sale at the end of an accounting period.