Downingtown Industries has an overall (composite) WACC of 10 percent. This cost of capital reflects the cost
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Question:
Downingtown Industries has an overall (composite) WACC of 10 percent. This cost of capital reflects the cost of capital for a Downingtown project with average risk; however, there are large risk differences among its projects. The company estimates that low-risk projects have a cost of capital of 8 percent and high-risk projects have a cost of capital of 12 percent. The company is considering the following projects:
ProjectExpected Return (IRR)Risk
A15%High
B12Average
C11High
D9Low
E6Low
Which of the projects should the company select to maximize shareholder wealth?
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