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	13%	High
B	5 million	10.5	High
C	3 million	8.5	Low
D	2 million	8.5	Average
E	6 million	11.5	High
F	5 million	11.5	Average
G	6 million	6.5	Low
H	3 million	10.5	Low

Ziege's WACC is 9.00%, 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?

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

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?

d. 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