Question
Vang Enterprises, which is debt-free and finances only with equity from retained earnings, is considering 7 equal-sized capital budgeting projects. Its CFO hired you to
Vang Enterprises, which is debt-free and finances only with equity from retained earnings, is considering 7 equal-sized capital budgeting projects. Its CFO hired you to assist in deciding whether none, some, or all of the projects should be accepted. You have the following information: r RF = 4.50%; RP M = 5.50%; and b = 0.98. The company adds or subtracts a specified percentage to the corporate WACC when it evaluates projects that have above- or below-average risk. Data on the 7 projects are shown below. If these are the only projects under consideration, how large should the capital budget be?
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|
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| Expected |
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| Project | Risk | Risk factor | return | Cost (millions) |
| 1 | Very low | -2.00% | 7.60% | $25.0 |
| 2 | Low | -1.00% | 9.15% | $25.0 |
| 3 | Average | 0.00% | 10.10% | $25.0 |
| 4 | High | 1.00% | 10.40% | $25.0 |
| 5 | Very high | 2.00% | 10.80% | $25.0 |
| 6 | Very high | 2.00% | 10.90% | $25.0 |
| 7 | Very high | 2.00% | 13.00% | $25.0 |
|
| a. | $50 |
|
| b. | $25 |
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| c. | $100 |
|
| d. | $125 |
|
| e. | $75 |
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
Concise 6th Edition
324664559, 978-0324664553
