Project Required Investment Rate of Return Risk $4 million 5 million A. 14.0% High 11.5 High 3 million 9.5 Low 2 million 6 million D 9.0 Average 12.5 High 5 million 6 million 3 million 12.5 Average 7.0 Low 11.5 Low

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Ziege Systems is considering the following independent
projects for the coming year:

 

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 constraints?
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?

Project
Required Investment Rate of Return
Risk
$4 million
5 million
A.
14.0%
High
11.5
High
3 million
9.5
Low
2 million
6 million
D
9.0
Average
12.5
High
5 million
6 million
3 million
12.5
Average
7.0
Low
11.5
Low
Transcribed Image Text:Project Required Investment Rate of Return Risk $4 million 5 million A. 14.0% High 11.5 High 3 million 9.5 Low 2 million 6 million D 9.0 Average 12.5 High 5 million 6 million 3 million 12.5 Average 7.0 Low 11.5 Low
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