Question 14: Practice Please show work,no excel! Thank you :) 14. [Extra +1] The

Question

Question 14: Practice

Please show work,no excel!

Thank you :)

14. [Extra +1] The managers of JJ's Enterprises are trying to determine the company's optimal capital budget for the upcoming year. JJ's is considering the following projects: The company estimates that its WACC is 11 percent. All projects are independent. The company adjusts for risk by adding 2 percentage points to the WACC for high-risk projects and subtracting 2 percentage points from the WACC for low-risk projects. Which of the projects will the company accept? Size $200, 000 500,000 400, 000 300, 000 100,000 200,000 400,000 Rate of Return 168 14 12 Risk High Average Pro Low High Average 10 10 (A) A, B, C,F

Explanation / Answer

We select projects when rate of return is higher than WACC.

WACC for higher risk = 13%. Only Project A is selected from the list of high risk projects.

WACC for average risk = 11%.Only Project B is selected from average risk projects.

WACC for lower risk = 9%. C and F are selected as their rate of return is higher than 9%.

Hence, we select A, B, C and F.

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