Question

Marble Construction estimates that its WACC is 8% 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 8.9%. The company believes that it will exhaust its retained earnings at $2,700,000 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 A $    700,000 13.5 % B 1,030,000 13.2 C 980,000 8.5 D 1,230,000 8.6 E 510,000 8.7 F 700,000 9.7 G 650,000 9.5 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 Y/N Project B Y/N Project C Y/N Project D Y/N Project E Y/N Project F Y/N Project G Y/N What is the firm's optimal capital budget? Round your answer to the nearest dollar. =$___

Answer 1

A project is acceptable when IRR is higher than WACC (8.9%). So the Marble construction will accept project A,B ,F and G,since it has IRR which is higher than WACC

Total Size of these projects are = 700,000 + 1,030,000 + 700,000 + 650,000 = 3,080,000

Since this is higher than the retained Earning breakeven therefore WACC is 8.9%

Firm's Optimal Capital Budget is shown below

Project	Size
A	700,000
B	1,030,000
F	700,000
G	650,000
Total optimal Budget	3,080,000