Problem 12-5 Optimal Capital Budget

Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects:

Project	Size, $	IRR, %
A	650,000	14.0
B	1,050,000	13.5
C	1,000,000	11.2
D	1,200,000	11.0
E	500,000	10.7
F	650,000	10.3
G	700,000	10.2

Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted?

A.

Project A	a. accept
Project B	b. accept
Project C	c. accept
Project D	d. accept
Project E	e. don't accept
Project F	f. don't accept
Project G	g. don't accept

B. What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000.

$

* I Got part A all correct, Just need solution for B.