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: rRF = 4.50%; RPM = 5.50%; and b = 0.89. 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?
Expected
Project | Risk | Risk factor | Return | Cost (Millions) | |
1 | Very Low | -2.00% | 7.60% |
| |
2 | Low | -1.00% |
| $25 | |
3 | Average | 0.00% | 10.10% | $25 | |
4 | High | 1.00% | 10.40% | $25 | |
5 | Very High | 2.00% | 10.80% | $25 | |
6 | Very High | 2.00% | 10.90% | $25 | |
7 | Very High | 2.00% | 13.00% | $25 |
A. $150 million
B. $175 million
C. $75 million
D. $100 million
E. $125 million
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started