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Question
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 = 0.86. 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
u200b
a. $150 million
b. $175 million
c. $75 million
d. $100 million
e. $125 million
Answer
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u200b u200b
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