Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 13, Problem 2P
OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10% if equity comes from
| Project | Size | |
| 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, and what is the firm’s optimal capital budget?
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Project Selection Midwest water works estimates that is WACC is 10.5%. The company is considering the following capital budgeting prokects:
Project
Size
Rate of Return
A
$1 million
12.0%
B
2 Million
11.5
c
2 million
11.2
D
2 million
11.0
E
1 million
10.7
F
1 million
10.3
G
1 Million
10.2
Assume that each of these projects is just as risky as the firm's existing assests and that the firm may accept all the projects or only some of them which set of projects should be accepted?
Explain.
Excel Online Structured Activity: WACC and optimal capital budget
Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of ra = 11%, and its tax rate is 30%. It can issue preferred stock that pays a
constant dividend of $5 per year at $59 per share. Also, its common stock currently sells for $30 per share; the next expected dividend, D1,
is $3.25; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common
stock, 15% debt, and 10% preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and
perform the required analysis to answer the questions below.
Open spreadsheet
a. What is the cost of each of the capital components? Round your answers to two decimal places. Do not…
Chapter 13 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 13 - Explain in general terms what each of the...Ch. 13 - Would a failure to recognize growth options tend...Ch. 13 - Companies often have to increase their initial...Ch. 13 - How might a firms corporate WACC be affected by...Ch. 13 - Prob. 5QCh. 13 - GROWTH OPTION Singh Development Co. is deciding...Ch. 13 - OPTIMAL CAPITAL BUDGET Marble Construction...Ch. 13 - Prob. 3PCh. 13 - ABANDONMENT OPTION The Scampini Supplies Company...Ch. 13 - OPTIMAL CAPITAL BUDGET Hampton Manufacturing...
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- Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%. 0 1 2 3 4 Project A -1,350 650 365 220 270 Project B -1,350 250 300 370 720 What is Project A's MIRR? Do not round intermediate calculations. Round your answer to two decimal places. % What is Project B's MIRR? Do not round intermediate calculations. Round your answer to two decimal places. % If the projects were independent, which project(s) would be accepted according to the MIRR method? If the projects were mutually exclusive, which project(s) would be…arrow_forwardQuantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%. 0 1 2 3 4 Project A -1,200 600 450 330 300 Project B -1,200 400 330 410 745 What is Project Delta's IRR? Do not round intermediate calculations. Round your answer to two decimal places. _____% What is the significance of this IRR? It is the_____, after this point when mutually exclusive projects are considered there is no conflict in project acceptance between the NPV and IRR approaches.arrow_forwardQuantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%. 0 1 2 3 4 Project A -1,050 600 360 300 290 Project B -1,050 200 295 450 740 What is Project A’s IRR? Do not round intermediate calculations. Round your answer to two decimal places. _________ % What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places. _________% If the projects were independent, which project(s) would be accepted according to the IRR method? If the projects were mutually exclusive, which…arrow_forward
- Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after - tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%. 0 1 2 3 4 Project A -1,050 650 435 280 330 Project B -1,050 250 370 430 780 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's discounted payback? Do not round intermediate…arrow_forwardQuantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%. 0 1 2 3 4 Project A -1,150 700 370 260 310 Project B -1,150 300 305 410 760 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. ______years What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. ________years What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. _________years…arrow_forwardQuantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%. 1 2 4 Project A -1,050 600 360 300 290 Project B -1,050 200 295 450 740 What is Project A's IRR? Do not round intermediate calculations. Round your answer to two decimal places. % What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places. % If the projects were independent, which project(s) would be accepted according to the IRR method? -Select- If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method? -Select- Could…arrow_forward
- Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC 9%. Project A Project B 0 1 -1,200 -1,200 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years 2 650 250 years 3 385 320 230 380 280 730 What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's discounted payback? Do not round intermediate calculations.…arrow_forwardQuantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%. ! 1 2 3 4 Project A -1,050 600 350 230 270 Project B -1,050 270 330 390 780 What is Project Delta's IRR? Do not round intermediate calculations. Round your answer to two decimal places. %arrow_forwardQuantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%. 10 2 3 4 Project A -1,000 650 Project B -1,000 250 What is Project A's MIRR? Do not round intermediate calculations. Round your answer to two decimal places. X3 Show All Feedback 1 Show All Feedback 360 295 250 400 What is Project B's MIRR? Do not round intermediate calculations. Round your answer to two decimal places. 300 750 BATERarrow_forward
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY