13-2. Optimal capital budget Marble Construction estimates that its WACC is 10 percent if equity comes from retained earnings. However, if thecompany 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 itsretained 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 isconsidering the following seven investment projects:ProjectSizeIRRA$1,000,00020%B1,000,00019C1,000,00018D1,000,00017E1,000,00016F2,000,000151G2,000,000Assume 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?

Here's a detailed explanation for better understanding. Internal Rate of Return (IRR): This is the…

Answered: 13-2. Optimal capital budget Marble…

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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United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $600,000, and because of market conditions, the company will not issue any new stock during the coming year. If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure? Select the correct answer. a. $856,402 b. $857,143 c. $856,896 d. $856,649 e. $857,390
The projected capital budget of Kandell Corporation is $575,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $575,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out? Select the correct answer. a. $344,887 b. $345,000 c. $344,831 d. $344,944 e. $344,774
Warren Supply Inc. wants to use debt and common equity for its capital budget of $800,000 in the coming year, but it will not issue any new common stock. It is forecasting an EPS of $3.00 on its 500,000 outstanding shares of stock and is committed to maintaining a $2.00 dividend per share. Given these constraints, what percentage of the capital budget must be financed with debt? a. 33.84% b. 37.50% c. 32.15% d. 30.54% e. 35.63%
Firm A has 11 equally risky capital budgeting projects, each costing $29.608 million and each having an expected rate of return of 8.25%. Firm A's retained earnings breakpoint is $296.08 million. The firm's WACC using retained earnings is 8.0% but increases to 8.5% if new equity must be issued. The company invests in projects where the expected return exceeds the cost of capital. How much capital should Firm A raise and invest? Note: answer is in millions of dollars, enter only the number
Firm A has 11 equally risky capital budgeting projects, each costing $29.608 million and each having an expected rate of return of 8.25%. Firm A’s retained earnings breakpoint is $296.08 million. The firm’s WACC using retained earnings is 8.0% but increases to 8.5% if new equity must be issued. The company invests in projects where the expected return exceeds the cost of capital. How much capital should Firm A raise and invest?
OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10% 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%. 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 7 investment projects: Project Size IRR 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 firms existing assets. Which set of projects should be accepted, and what is the firms optimal capital budget?
WACC AND OPTIMAL CAPITAL BUDGET Adams Corporation is considering four average-risk protects 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 rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of 500 per year at 4900 per share. Also, its common stock currently sells for 36.00 per share; the next expected dividend, D1 is 3.50; 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. a. What is the cost of each of the capital components? b. What is Adams WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?
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…
19. Oliver Stone and Rock Company uses a process of capital rationing in its decision making. The firm's cost of capital is 12 percent. It will invest only $80,000 this year. It has determined the internal rate of return for each of the following projects. Percent of Internal Rate Project Project Size of Return A $15,000 14% 25,000 19 C 30,000 10 25,000 16.5 E 20,000 21 15,000 11 25,000 18 H 10,000 17.5 a. Pick out the projects that the firm should accept. b. If Projects B and G are mutually exclusive, how would that affect your overall answer? That is, which projects would you accept in spending the $80,000?
Midwest Water Works estimates that its WACC is 10.45%. The company is considering the following capital budgeting projects. Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be асcсepted? Project Size Rate of Return А $1 million 12.0% -Select- В 2 million 11.5 -Select- 2 million 11.2 -Select- 2 million 11.0 -Select- E 1 million 10.7 -Select- F 1 million 10.3 -Select- 1 million 10.2 -Select-
Suppose Firm A plans to retain $100 million of earnings for the year. It wants tofinance its capital budget using a target capital structure of 46% debt, 3% preferred,and 51% common equity. How large could its capital budget be before it must issuenew common stock?

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