Ziege Systems is considering the following independent projects for the coming y

Question

Ziege Systems is considering the following independent projects for the coming year.

Project---Required Investment------ Rate of Return----- Risk
A-------------$4 million---------------------13%---------High
B--------------5 million---------------------10.5---------High
C--------------3 million--------------------- 8.5---------Low
D--------------2 million--------------------- 8.5---------Average
E--------------6 million---------------------11.5---------High
F--------------5 million---------------------11.5---------Average
G--------------6 million--------------------- 6.5---------Low
H--------------3 million--------------------10.25---------Low

Ziege's WACC is 9.00%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects. If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Round your answer to two decimal places.

$ 12 million


Suppose Ziege can raise additional funds beyond the $13 million, but each new increment (or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. What would be the dollar size of its capital budget? Round your answer to two decimal places.

$ ________________million

Explanation / Answer

project RETAINED INVESTMENT RATE OF RETURN RISK WACC=10% + - 2% A 4 MILLION 14 % HIGH 12% B 5 MILLION 11.50 % HIGH 12% C 3 MILLION 9.50 % LOW 8% D 2 MILLION 9 % AVERAGE 10% E 6 MILLION 12.50 % HIGH 12% F 5 MILLION 12.50 % AVERAGE 10% G 6 MILLION 7 % LOW 8% H 3 MILLION 11.50 % LOW 8% RATE OF RETURN =-MORE THAN WACC -ACCEPTED CAPITAL BASIS ----------A C E F H -------PROJECTS -ACCEPTED

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