Question

Ch 12: End-of-Chapter Problems - Cash Flow Estimation and Risk Analysis 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 earnings. The company is considering the following seven investment projects: Project Size IRR $650,000 14.0% 1,050,000 13.5 1,000,000 1,200,000 11.0 500,000 650,000 10.3 700,000 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- What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000. Grade It Now Save & Continue

Answer 1

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PROJECTS: A, B, C AND D ARE ACCEPTED.

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins Z AutoSum Cut AC EWrap Text Calibri 11 General Copy Fill Merge & Center Sort & Find & Paste B I U Conditional Format Cell Insert Delete Format % Format Painter Clear Filter Select Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox EM226 EG EH EI FI EK EL EM EN EO EP EQ ER ES 213 214 MARBLE 215 PROJECT SIZE WACC(10%) < IRR 216 A 650000 ACCEPT 1050000 ACCEPT WACC(10%) < IRR 217 B WACC(10.8% < IRR 218 1000000 ACCEPT RETAINED EARNINGS = 2500000 EXHAUSTED WACC(10.8%)< IRR 219 D 1200000 ACCEPT 220 WACC(10.8%)> IRR E 500000 REJECT WACC(10.8%) > IRR 221 F 650000 REJECT 700000 REJECT WACC(10.8%) > IRR 222 G 223 224 225 OPTIMAL BUDGET = 3900000 226 (PROJECT A,B,C,D) 227 228 229 230 231 STI E 130% HPR GMAM BETA LEVERED REPLACEMENT S IRRnpvbeta NPV RATION PBP ARR invest, EAA MI-np-ir EAC MACRS RELEVANT REPLACEMENT BOND OPTION TO WAIT erences: JF17 W 11:17 C ENG 30-10-2019