Question

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 seven 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 firm's existing assets. Which set of projects should be accepted?

Project A	-Select-AcceptDon't acceptItem 1
Project B	-Select-AcceptDon't acceptItem 2
Project C	-Select-AcceptDon't acceptItem 3
Project D	-Select-AcceptDon't acceptItem 4
Project E	-Select-AcceptDon't acceptItem 5
Project F	-Select-AcceptDon't acceptItem 6
Project G	-Select-AcceptDon't acceptItem 7

What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000.
$

Answer 1

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