17.

ADJUSTING COST OF CAPITAL FOR RISK

Ziege Systems is considering the following independent projects for the coming year:

Project	Required Investment	Rate of Return	Risk
A	$4 million	11%	High
B	5 million	13.5	High
C	3 million	9	Low
D	2 million	8	Average
E	6 million	12	High
F	5 million	12	Average
G	6 million	6	Low
H	3 million	10.5	Low

Ziege's WACC is 9.50%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

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

Project A	-Select-AcceptRejectItem 1
Project B	-Select-AcceptRejectItem 2
Project C	-Select-AcceptRejectItem 3
Project D	-Select-AcceptRejectItem 4
Project E	-Select-AcceptRejectItem 5
Project F	-Select-AcceptRejectItem 6
Project G	-Select-AcceptRejectItem 7
Project H	-Select-AcceptRejectItem 8

If Ziege can only invest a total of $13 million, which projects should it accept?

Project A	-Select-AcceptRejectItem 9
Project B	-Select-AcceptRejectItem 10
Project C	-Select-AcceptRejectItem 11
Project D	-Select-AcceptRejectItem 12
Project E	-Select-AcceptRejectItem 13
Project F	-Select-AcceptRejectItem 14
Project G	-Select-AcceptRejectItem 15
Project H	-Select-AcceptRejectItem 16

If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.

$ million

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?

Project A	-Select-AcceptRejectItem 18
Project B	-Select-AcceptRejectItem 19
Project C	-Select-AcceptRejectItem 20
Project D	-Select-AcceptRejectItem 21
Project E	-Select-AcceptRejectItem 22
Project F	-Select-AcceptRejectItem 23
Project G	-Select-AcceptRejectItem 24
Project H	-Select-AcceptRejectItem 25

What would be the dollar size of its capital budget? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.

$ million