Vanguard has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Vanguard 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%
Which set of projects would maximize shareholder wealth?
Vanguard has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Vanguard 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%
Which set of projects would maximize shareholder wealth?
Related questions
1.Following are three independent projects Peanut/ Pecan Processing (PPP) is evaluating:
| Project | IRR | RISK |
| P | 10% | Low |
| Q | 12% | Average |
| R | 14.5% | High |
PPP generally considers risk when examining projects by adjusting its average required rate of return, r, which equals 11 percent. A 4 percent adjustment is made for high-risk projects, and a 2 percent adjustment is made for low-risk projects. Which project(s) should PPP purchase?
2.The CFO of Lazy Loungers is evaluating the following independent, indivisible projects:
| Project | Cost | IRR |
| A | $10,000 | 21.0% |
| B | 15,000 | 20 |
| C | 25,000 | 16 |
Lazy's weighted average cost of capital (WACC) is 14 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 17 percent. Lazy's capital structure consists of 40 percent debt. If Lazy has no preferred stock and expects to generate $24,000 in retained earnings this year, which project(s) should be purchased?
Please explain how you got the answer and do it by step by step Thank you
Vang Enterprises, which is debt-free and finances only with equity from retained earnings, is considering 7 equal sized capital budgeting projects. Its CFO hired you to assist in deciding whether none, some, or all of the projects should be accepted. You have the following information: rRF = 4.50%; RPM = 5.50%; and b = 0.93. The company adds or subtracts a specified percentage to the corporate WACC when it evaluates projects that have above- or below-average risk. Data on the 7 projects are shown below. If these are the only projects under consideration, how large should the capital budget be?
| Risk | Expected | Cost | ||||
| Project | Risk | Factor | Return | (Millions) | ||
| 1 | Very low | -2.00% | 7.60% | $25.0 | ||
| 2 | Low | -1.00% | 9.15% | $25.0 | ||
| 3 | Average | 0.00% | 10.10% | $25.0 | ||
| 4 | High | 1.00% | 10.40% | $25.0 | ||
| 5 | Very high | 2.00% | 10.80% | $25.0 | ||
| 6 | Very high | 2.00% | 10.90% | $25.0 | ||
| 7 | Very high | 2.00% | 13.00% | $25.0 | ||
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