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Which set of projects should be accepted, and what is the firm%u2019s optimal capital budget?

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Optimal Capital Budget 1 answer below » Optimal Capital Budget Hampton Manufacturing estimates that its WACC is 12% if equity comes from retained earnings. However, if the company issues new stick to raise new equity, it estimates that its WACC will rise to 12.5%. The company believes that it will
exhaust its retained earnings at $3,250,000 of capital due to the number of highly profitable following seven investment projects: Projects Size IRR A $750,000 14.0% B $1,250,000 13.5 C $1,250,000 13.2 D $1,250,000 13.0 E $750,000 12.7 F $750,000 12.3 G $750,000 12.2 a. Assume View complete question » Optimal Capital Budget Hampton Manufacturing estimates that its WACC is 12% if equity comes from retained earnings. However, if the company issues new stick to raise new equity, it estimates that its WACC will rise to 12.5%. The company believes that it will
exhaust its retained earnings at $3,250,000 of capital due to the number of highly profitable following seven investment projects: Projects Size IRR A $750,000 14.0% B $1,250,000 13.5 C $1,250,000 13.2 D $1,250,000 13.0 E $750,000 12.7 F $750,000 12.3 G $750,000 12.2 a. Assume that each of these projects is independent and that each is just as risky as the firm%u2019s existing assets. Which set of projects should be
accepted, and what is the firm%u2019s optimal capital budget? b. Now assume that Projects C and D are mutually exclusive. Project D has an NPV of $400,000, whereas Project C has an NPV of $350,000. Which set of
projects should be accepted, and what is the firm%u2019s optimal capital budget? c. Ignore Part b and assume that each of the projects is independent but that management decides to incorporate project risk differentials. Management
judges Projects B, C, D, and E to have average risk; Project A to have high risk; and Projects F and G to have low risk. The company adds 2% to the
WACC of those projects that are significantly more risky than average, and it subtracts 2% from the WACC of those projects that are substantially less
risky than average. Which set of projects should be accepted, and what is the firm%u2019s optimal capital budget? View less » Jan 17 2014 06:22 PM



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