Question

S. Bouchard and Company, 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 = 0.86. 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?

Project	Risk	Risk Factor	Return	Cost(millions)
1	Very Low	-2.00%	7.6%	25
2	Low	-1.00%	9.15%	25
3	Average	0.00%	10.10%	25
4	High	1.00%	10.40%	25
5	Very High	2.00%	10.8%	25
6	Very High	2.00%	10.90%	25

7 . Very High . 2.00% 13.00% . 25

Answer 1

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- 2x Find & Select projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General Ea Copy Fill Paste I U - B D A SF Merge Merge & Center Center $ - % % 4:0 .00 8.9 Conditional Format Cell Insert Delete Format Sort & Format Painter Formatting as Table Styles 2 Clear Filter Clipboard Font Alignment CD Number Styles Cells Editing EJ674 EG EH EI EK EL E M E N EO ED EQ 656 657 WACC = REQUIRED RATE = Rf + beta*(Rm-Rf) 658 Rm-Rf = RPM = RISK PREMIUM = 5.5%, Rf = RISK FREE RATE = 4.5% ER ES 659 WACC = REQUIRED RATE = 4.5% + 0.86*(5.50%) = 9.23% 660 661 662 663 664 665 666 667 668 669 670 671 672 673 674 PROJECT RISK 1 VERY LOW 2 LOW 3 AVERAGE 4 HIGH 5 VERY HIGH 6 VERY HIGH 7 VERY HIGH RISK FACTOR -2% -1% 0% 1% 2% 2% 2% RETURN WACC CALCULATION 16.00% 9.23% -2% = 14.00% 9.23% -1% = 12.50% 9.23% = 11.50% 9.23% + 1% = 10.70% 9.23% + 2% = 10.00% 9.23% +2% = 5.00% 9.23% +2% = WACC 7.23% 8.23% 9.23% 10.23% 11.23% 11.23% 11.23% RETURN INVESTMENT 7.60% 9.15% 10.10% 10.40% 10.80% 10.90% 13.00% AMOUNT OF CAPITAL BUDGET = 125 675 676 H invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT I RRnpvbeta RATION PBP ARR ferences: JF17 BOND OPTION TO WAITSTEIN BOI 120% Rea - ODOB 9 * * OENG 22-11-2019