A company, which is debt-free and finances only with equity from retained earnings, is considering 7...

 

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A company, 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: TRF = 4.50%; RPM = 5.50%; and b = 0.85. 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? Project Risk Risk factor Expected return Cost (millions) 1 Very low -2.00% 7.60% 2 Low 3 Average 4 High -1.00% 9.15% 0.00% 10.10% 7 Very high 1.00% 5 Very high 2.00% 10.80% 10.40% 6 Very high 2.00% 10.90% 2.00% 13.00% $25 $25 $25 $25 $25 $25 $25 A company, 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: TRF = 4.50%; RPM = 5.50%; and b = 0.85. 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? Project Risk Risk factor Expected return Cost (millions) 1 Very low -2.00% 7.60% 2 Low 3 Average 4 High -1.00% 9.15% 0.00% 10.10% 7 Very high 1.00% 5 Very high 2.00% 10.80% 10.40% 6 Very high 2.00% 10.90% 2.00% 13.00% $25 $25 $25 $25 $25 $25 $25

Answer rating: 100% (QA)

1 Calculate the corporate WACC WACC 1brRF bRPm 1085450 085550 5025 2 Adjust the ... View the full answer