View the step-by-step solution to:

Marwa Manufacturing estimates that its WACC is 11% if equity comes from retained earnings. However, if the company issues new stock to raise new...

Marwa Manufacturing estimates that its WACC is 11% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will raise to 12.5%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects:
Project
Size
IRR
A
$ 750,000
14.0%
B
1,150,000
13.5%
C
1,250,000
12.2%
D
1,250,000
12.0%
E
600,000
11.0%
F
750,000
10.3%
G
800,000
10.2%

a- Assume that each of these projects is independent and that each is just as risky as the firm’s existing assets. Which set of projects should be accepted, and what is the firm’s optimal capital budget?
b- Now assume that C and D are mutually exclusive. Project C has NPV of $300,000 while project D has NPV of $350,000. Which set of projects should be accepted?
c- Ignore part b, and assume that each of the projects is independent but the management decides to incorporate project risk differentials. Management judges Project B,C, and D to have average risk; project A to have high risk, and project E,F and G to have low risk. The company adds 2.5% to the WACC of those projects that are significantly more risk than average, and it subtract 2.5% 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 new optimal capital budget.
Sign up to view the entire interaction

Top Answer

The answer is... View the full answer

Finance - 8368740.xls

Marwa Manufacturing estimates that its WACC is 11% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that
its WACC will raise to...

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online