13-2. Optimal capital budget Marble Construction estimates that its WACC is 10 percent 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 percent. 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 $1,000,000 20% B 1,000,000 19 C 1,000,000 18 D 1,000,000 17 E 1,000,000 16 F 2,000,000 15 1 G 2,000,000 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, and what is the firm's optimal capital budget?

13-2. Optimal capital budget Marble Construction estimates that its WACC is 10 percent 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 percent. 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 $1,000,000 20% B 1,000,000 19 C 1,000,000 18 D 1,000,000 17 E 1,000,000 16 F 2,000,000 15 1 G 2,000,000 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, and what is the firm's optimal capital budget?

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter13: Real Options And Other Topics In Capital Budgeting

Section: Chapter Questions

Problem 2P: OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10% if equity comes from...

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