Which projects should ziege accept if it faces no capital

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Ziege Systems is considering the following independent projects for the coming year:

Project Retained investment Rate of Return Risk

A $4 million 14.0% High

B 5 million 11.5 High

C 3 million 9.5 Low

D 2 million 9.0 Average

E 6 million 12.5 High

F 5 million 12.5 Average

G 6 million 7.0 Low

H 3 million 11.5 Low

Ziege's WACC is 10%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

a) Which projects should Ziege accept if it faces no capital constrains?

b) If Ziege can only invest a total of $13 million, which projects should it accept and what would be the dollar size of its capital budget?

c) Suppose Ziege can raise additional funds beyond the $13 million, but each new increment ( or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which projects should it now accept and what would be the dollar size of its capital budget?

Reference no: EM13569584

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