Martinez Manufacturing estimates that its WACC is 11 percent of Equity comes from retained earnings. However, if the company issues new stock to rise new equity , it estimates that its WACC will rise to 11.6 percent. The company believes that it will exhaust its retained earnings due to number of highly profitable projects available to the firm. The company is considering seven investment projects: (8Marks)

Project	Size	IRR
A	$250,000	13.0%
B	420,000	12.5
C	420,000	12.2
D	420,000	12.0
E	250,000	11.5
F	250,000	11.3
G	250,000	11.1

1 Assume that each of these projects is independent and that each is just as risky a the firm’s existing assets. Which set of projects should be accepted , and what is the firm’s optimal capital budget ? - explain and analyze it

1. 2 Projects A,B, C, D and E are all acceptable, and the firm’s optimal capital budget is $1,760,000.

2. 3 All the projects are acceptable, and the firm’s optimal capital budget is $2,260,000.

3. 4 Projects A, B, C, D, E and F are all acceptable, and the firm’s optimal capital budget is $2,010,000

4. 5 Projects A,B, C and D are all acceptable, and the Firm’s optimal capital budget is $1,510,000.

5. 6 There is not enough information given in the problem to arrive at an answer

Answer rating: 100% (QA)

Solution The correct answer is Projects AB C and D are all accepta... View the full answer