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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Question
![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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2c771024-8eab-4e71-907a-eb9f1afce789%2Fb8f84181-9d73-4bb4-b5ad-bdace47418ac%2Fz2p320a_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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?
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