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: rRF = 4.50%; RPM = 5.50%; and b = 0.98. 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? Expected Project Risk Risk factor return Cost (millions) 1 Very low -2.00% 7.60% $25 2 Low -1.00% 9.15% $25 3 Average 0.00% 10.10% $25 4 High 1.00% 10.40% $25 5 Very high 2.00% 10.80% $25 6 Very high 2.00% 10.90% $25 7 Very high 2.00% 13.00% $25 a. $75 million b. $100 million c. $50 million d. $125 million e. $25 million

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: rRF = 4.50%; RPM = 5.50%; and b = 0.98. 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? Expected Project Risk Risk factor return Cost (millions) 1 Very low -2.00% 7.60% $25 2 Low -1.00% 9.15% $25 3 Average 0.00% 10.10% $25 4 High 1.00% 10.40% $25 5 Very high 2.00% 10.80% $25 6 Very high 2.00% 10.90% $25 7 Very high 2.00% 13.00% $25 a. $75 million b. $100 million c. $50 million d. $125 million e. $25 million

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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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 Project Risk 1 2 3 4 5 6 7 a. $ 50 b. $ 25 c. $75 Very low Low Average High Very high Very high Very high e. $0 d. $100 Factor Return ?2.00% 7.60% (Millions) $25.0 $25.0 0.00% 10.10% $25.0 ?1.00% 9.15% 1.00% 10.40% $25.0 2.00% 10.80% $25.0 2.00% 10.90% $25.0 2.00% 13.00% $25.0
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			Expected
Project	Risk	Risk factor	return	Cost (millions)
1	Very low	-2.00%	7.60%	$25
2	Low	-1.00%	9.15%	$25
3	Average	0.00%	10.10%	$25
4	High	1.00%	10.40%	$25
5	Very high	2.00%	10.80%	$25
6	Very high	2.00%	10.90%	$25
7	Very high	2.00%	13.00%	$25