Ballack Inc. is a 100% equity-financed company (no debt or preferred stock); hen

Question

Ballack Inc. is a 100% equity-financed company (no debt or preferred stock); hence its weighted average cost of capital (WACC) equals its cost of common equity. Ballack's retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.3, the risk-free rate is 5.0% and the market risk premium is 6.5%. Ballack's WACC is: 13.45%

Ballack is considering the following projects for next year:

Each project has average risk, and Ballack accepts any project whose expected rate of return exceeds its cost of capital. How large should next year's capital budget be?

Please show how you got your answer for 5 star rating! Thanks!

Explanation / Answer

project W,Y and Z are chosen, as their expected rate of return exceeds its cost of capital. therefore the capital busget= 1000+3000+4000= $8000

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