Johnson Corporation considers its optimal capital structure to be 60 percent debt and 40 percent common stock. Johnson can borrow unlimited amounts at 12 percent. The common stock can be issued with a required return of 22%. Johnson has a tax rate of 25 percent.

Johnson is considering four investment proposals:

Expected Level of Investment

Project Return Risk Required

A 9% Low $200,000,000

B 15% Ave $300,000,000

C 18% Ave $400,000,000

D 30% High $200,000,000

When Johnson evaluates a project, they consider the level of risk. If the risk level is high, Johnson adds a premium of three percent to the WACC. If the risk level is low, Johnson subtracts one percent.

Required:

Determine Johnsons weighted average cost of capital (WACC).

Determine Johnsons optimal capital budget.