Question

Апаlysis OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10 % if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earmings. The company is considering the following seven investment projects: Project Size IRR A $650,000 14.0% B 1,050,000 13.5 C 1,000,000 11.2 D 1,200,000 11.0 500,000 10.7 F 650,000 10.3 G 700,000 10.2 Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted? Project A Select Project B -Select Project C -Select Project D Select Project E -Select- Project F -Select Project G Select- Select- but your answer completely. For example, 13 million should be entered as 13,000,000. What is the firm's optimal capital t Accept Don't accept

Answer 1

a. Project A: ACCEPT
Project B: ACCEPT
Project C: ACCEPT
Project D: ACCEPT
Project E: DON'T ACCEPT
Project F: DON'T ACCEPT
Project G: DON'T ACCEPT

b. The firm's optimal capital budget will be as follows:

= $ 650,000 + $ 1,050,000 + $ 1,000,000 + $ 1,200,000

= $ 3,900,000

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