Kenforest Grocers\' managers are determining the company\'s optimal capital budg
ID: 2736190 • Letter: K
Question
Kenforest Grocers' managers are determining the company's optimal capital budget for the next year. Kenforest is considering the following projects:'
Project
Size
Return
Risk
A
$200,000
16%
High
B
500,000
14
Average
C
400,000
12
Low
D
300,000
11
High
E
100,000
10
Average
F
200,000
10
Low
G
400,000
7
Low
The company estimates that its WACC is 11%. All projects are independent. The company adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% from the WACC for low-risk projects. Which of the projects will the company accept?
A, B, C, E, F
B, D, F, G
A, B, C, E
A, B, C, D, E
A, B, C, F
Project
Size
Return
Risk
A
$200,000
16%
High
B
500,000
14
Average
C
400,000
12
Low
D
300,000
11
High
E
100,000
10
Average
F
200,000
10
Low
G
400,000
7
Low
Explanation / Answer
WACC for A = 11% + 2% = 13% which is less than 16%. Therefore A is acceptable.
WACC for B = 11% which is less than 14%. Therefore B is acceptable.
WACC for C = 11% - 2% = 9% which is less than 12%. Therefore C is acceptable.
WACC for D = 11% + 2% = 13% which is higher than 11%. Therefore D is not acceptable.
WACC for E = 11% which is higher than 10%. Therefore E is not acceptable.
WACC for F = 11% - 2% = 9% which is less than 10%. Therefore F is acceptable.
WACC for G = 11% - 2% = 9% which is higher than 7%. Therefore G is not acceptable.
So, the company will accept A, B, C, F which is the 5th option.
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