Question

Vang Enterprises, which is debt-free and finances only with equity from retained earnings, is considering 7 equal-sized capital budgeting projects. Its CFO hired you to assist in deciding whether none, some, or all of the projects should be accepted. You have the following information: r_RF = 4.50%; RP_M = 5.50%; and b = 0.98. The company adds or subtracts a specified percentage to the corporate WACC when it evaluates projects that have above- or below-average risk. Data on the 7 projects are shown below. If these are the only projects under consideration, how large should the capital budget be?

			Expected
Project	Risk	Risk factor	return	Cost (millions)
1	Very low	-2.00%	7.60%	$25
2	Low	-1.00%	9.15%	$25
3	Average	0.00%	10.10%	$25
4	High	1.00%	10.40%	$25
5	Very high	2.00%	10.80%	$25
6	Very high	2.00%	10.90%	$25
7	Very high	2.00%	13.00%	$25

a. $125 million

b. $100 million

c. $25 million

d. $50 million

e. $75 million

Answer 1

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