10-19ADJUSTING COST OF CAPITAL FOR RISK Ziege Systems is considering the following independent projects for the coming year:

Zieges WACC is 10%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

a. Which projects should Ziege accept if it faces no capital constraints?

b. If Ziege can only invest a total of $13 million, which projects should it accept, and what would be the dollar size of its capital budget?

c. Suppose Ziege can raise additional funds beyond the $13 million, but each new increment (or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which projects should it now accept, and what would be the dollar size of its capital budget?

\begin{tabular}{|c|c|c|c|} \hline Project & Required Investment & Rate of Return & Risk \\ \hline A & $4 million & 14.0% & High \\ \hline B & 5 million & 11.5 & High \\ \hline C & 3 million & 9.5 & Low \\ \hline D & 2 million & 9.0 & Average \\ \hline E & 6 million & 12.5 & High \\ \hline F & 5 million & 12.5 & Average \\ \hline G & 6 million & 7.0 & Low \\ \hline H & 3 million & 11.5 & Low \\ \hline & & & \\ \hline \end{tabular}