Marble Construction estimates that its WACC is 10 percent ifequity comes from retained earnings. However, if the company issuesnew stock to raise new equity, it estimates that its WACC will riseto 10.8 percent. The company believes that it will exhaust itsretained earnings at $2,500,000 of capital due to the number ofhighly profitable projects available to the firm and its limitedearnings. The company is considering the following seven investmentprojects:                                            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 eachis just as risky as the firm’s existing assets. Which set ofprojects should be accepted, and what is the firm’s optimalcapital budget?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Marble Construction estimates that its WACC is 10 percent ifequity comes from retained earnings. However, if the company issuesnew stock to raise new equity, it estimates that its WACC will riseto 10.8 percent. The company believes that it will exhaust itsretained earnings at $2,500,000 of capital due to the number ofhighly profitable projects available to the firm and its limitedearnings. The company is considering the following seven investmentprojects:

                     

                     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 eachis just as risky as the firm’s existing assets. Which set ofprojects should be accepted, and what is the firm’s optimalcapital budget?

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