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15 September, 13:22

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:Col1 Project A B C DCol2 Risk High Average High Low Col3 Expected Return 15% 12% 11% 9%Which set of projects would maximize shareholder wealth?

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  1. 15 September, 15:56
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    The projects which maximize Vanguard's shareholder wealth are Project A; Project B; Project D.

    Explanation:

    Projects which maximize the shareholder value are projects delivering Expected Returns which are higher than its risk-adjusted weighted average cost of capital (WACC).

    As a result, Project A with Expected return of 15% and risk adjusted WACC of 12%; Project B with Expected return of 12% and risk adjusted WACC of 10%; Project D with Expected return of 9% and risk adjusted WACC of 8%; are the projects that maximize the shareholder's value.

    On the other hand, Project C with Expected return of 11% and risk adjusted WACC of 12% is harmful to shareholder value.
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