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: TRF = 4.50%; RPM = 5.50%; and b = 0.92. 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? Risk Expected Cost Factor Return (Millions) ?2.00% 7.60% $25.0 $25.0 0.00% 10.10% $25.0 1.00% 10.40% $25.0 2.00% 10.80% $25.0 2.00% 10.90% $25.0 2.00% 13.00% $25.0 Project Risk 1 2 3 4 5 6 7 a. $ 50 c. $75 Very low Low b. $ 25 Average High Very high Very high Very high e. $0 d. $100 ?1.00% 9.15%

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: TRF = 4.50%; RPM = 5.50%; and b = 0.92. 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? Risk Expected Cost Factor Return (Millions) ?2.00% 7.60% $25.0 $25.0 0.00% 10.10% $25.0 1.00% 10.40% $25.0 2.00% 10.80% $25.0 2.00% 10.90% $25.0 2.00% 13.00% $25.0 Project Risk 1 2 3 4 5 6 7 a. $ 50 c. $75 Very low Low b. $ 25 Average High Very high Very high Very high e. $0 d. $100 ?1.00% 9.15%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 13P

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