Question
Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity,
Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects:
| Project | Size | IRR |
| A | $650,000 | 14.0% |
| B | 1,050,000 | 13.5 |
| C | 1,000,000 | 11.2 |
| D | 1,200,000 | 11.0 |
| E | 500,000 | 10.7 |
| F | 650,000 | 10.3 |
| G | 700,000 | 10.2 |
Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted?
| Project A | Accept/Don't accept |
| Project B | Accept/Don't accept |
| Project C | Accept/Don't accept |
| Project D | Accept/Don't accept |
| Project E | Accept/Don't accept |
| Project F | Accept/Don't accept |
| Project G | Accept/Don't accept |
What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000. $
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