Barry Enterprises, which is debt-free and finances only with equity from retained earnings, is considering 7...
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Barry 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: ● Risk-free rate is 4.5% • Market risk premium is 5.5% ● The company beta is 0.92 Bank borrowing/lending rate is 8%pa • Company tax rate is 30% 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. Project Risk Risk Factor Expected Return Initial Cost ($m) 1 $25 2 $25 3 $25 4 $25 5 $25 6 $25 7 $25 Very low Low Average High Very high Very high Very high -2% -1% 0 1% 2% 2% 2% 7.66% 9.15% 10.13% 10.44% 10.89% 11.23% 13.17% (a) If these are the only projects under consideration, how large should the capital budget be? (b) If Barry Enterprises has a fixed capital budget of $50 million, which project(s) should be accepted? Barry Enterprises, which is debt-free and finances only with equity from retained earnings, is considering 7 equal-sized capital budgeting projects. Its CFO hired you to assist in deciding whether none, some, or all of the projects should be accepted. You have the following information: ● Risk-free rate is 4.5% • Market risk premium is 5.5% ● The company beta is 0.92 Bank borrowing/lending rate is 8%pa • Company tax rate is 30% The company adds or subtracts a specified percentage to the corporate WACC when it evaluates projects that have above or below average risk. Data on the 7 projects are shown below. Project Risk Risk Factor Expected Return Initial Cost ($m) 1 $25 2 $25 3 $25 4 $25 5 $25 6 $25 7 $25 Very low Low Average High Very high Very high Very high -2% -1% 0 1% 2% 2% 2% 7.66% 9.15% 10.13% 10.44% 10.89% 11.23% 13.17% (a) If these are the only projects under consideration, how large should the capital budget be? (b) If Barry Enterprises has a fixed capital budget of $50 million, which project(s) should be accepted?
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a To determine the appropriate capital budget for Barry Enterprises we need to calculate the Weighte... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-1337395250
15th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
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