The correct option is 3. A, B, and D.
The set of projects would maximize shareholder wealth is A, B, and D.
<h3>What is low-risk projects?</h3>
Low risk suggests that there won't be a significant negative effect on the organization should the project fail.
The computation of the provided data is displayed below, depending on the circumstance:
To determine which projects set would maximize shareholder wealth, we must compare the WACC to the anticipated return.
Below are some specific risk WACC (needed return) (%), expected return (%), and accept or reject reasons-
- High 12 Project A 15 Select WACC is less profitable than anticipated.
- The return for Project B's Average 10-12 Select WACC is less than anticipated.
- WACC for Project C High 12/11 Reject is greater than anticipated return.
- Low Project D 8-9 Select WACC is less profitable than anticipated.
- WACC for Project E Low 8 6 Reject is higher than anticipated return.
Therefore, in order to maximize shareholder wealth, option C (projects A, B, and D) should be chosen.
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The complete question is-
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:
Project Risk Expected Return
A High 15%
B Average 12%
C High 11%
D Low 9%
E Low 6%
Required:
Which set of projects would maximize shareholder wealth?
- A and B.
- A, B, and C.
- A, B, and D.
- A, B, C, and D. A, B, C, D, and E.
