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

question 31

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 risk-adjusted project cost of capital of 8%, average-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects:
$\begin{array}{ccc}\text { Project } & \text { Pisk } & \text { Expected Return } \\\text { A } & \text { High } & 15 \% \\\text { B }& \text { Average } & 12 \% \\\text { C } & \text { High } & 11 \% \\\text { D } & \text { Low } & 9 \% \\\text { E }& \text { Low } & 6 \%\end{array}$
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:

Least Squares Line

A straight line that best fits the data points on a scatter plot, minimizing the sum of the squares of the vertical distances of the points from the line.

Coefficient of Determination

A statistical measure, often denoted as \(R^2\), which quantifies the amount of variance of the dependent variable that can be explained by the independent variable(s).

Coefficient of Correlation

A mathematical indicator that evaluates the intensity of the connection between two factors.

Sum of Squares

A measure used in statistical analyses to quantify the variation or deviation of data points from their mean; the total of each data point's squared difference from the mean.