4.A firm is reviewing its next year's budget with the following projects.

Project

A

B

C

D

IRR

A) 9.0%

B) 9.5%

C) 10.5%

D) 10.0%

Capital Required

A) $0.5 million

B) $0.7 million

C) $1.5 million

D) $0.8 million

A capital structure of 60% debt and 40% equity needs to be kept.Besides $0.6 million retained earnings, firm can also borrow up to $1.2 million at an after-tax cost of 5%.For any new debt, the rate is 7% after tax.The cost of existing equity is 9% and the cost of new equity is 12%.How much is the optimal budget?