Question

2) LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?

a) Project B, which of the below-average risk and had a return of 8.5%

b) Project A, which is of average risk and has a return of 9%

c) Project C, which is of above-average risk and has a return of 11%.

d) None of the projects

e) All of the projects (A,B, C)

3) To calculate the WACC we use the:

a) market rates and values

b) book rates and values (accounting book values)

4) Which of the following can be written off against a corporations taxes?

a) common stock dividends

b) interest payments on debt

c) preferred stock dividends

Answer 1

The answer is

a) Project B, which of the below-average risk and had a return of 8.5%

Those projects which provide return higher than the risk adjusted cost must be selected

Hence, project B should be selected

Other projects provide lower return compared to relevant cost of capital

3) a) market rates and values

As it reflects better composition of capital structure

4) b) interest payments on debt

Interest payments are tax deductible while dividend payments are not