Question

angston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Langston 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

Answer 1

Answer:

The correct answer is project A, B and D.

Explanation:

According to the given scenario, the given data are as follows:

Low risk WACC project = 8%

Average risk WACC project = 10%

High risk WACC project = 12%

As the company always prefer the projects that exceeds the WACC projects.

So,

• Project A has 15% which exceeds the high risk WACC project.
• Project B has 12% which exceeds the average risk WACC project
• Project C has 11% which does not exceeds the high risk WACC project, hence it is not the correct answer.
• Project D has 9% which exceeds the low risk WACC project.