Marvelous Manufacturing (MM) generated the following information for its capital budgeting manager: ? Capital Structure Project Cost IRR Type of Capital Proportion W $65,000 15%
Debt 30% X 70,000 13 Common equity 70 Y 75,000 12 Z 70,000 11 ? MM's weighted average cost of capital (WACC) is 12 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 16 percent. If MM expects to generate $70,000 in retained earnings this year, which project(s) should be purchased? Assume that the projects are independent and indivisible.
A. Only Project W should be purchased.
B. Projects W and X should be purchased.
C. Projects W, X, and Y should be purchased.
D. All of the projects should be purchased.
E. None of the projects should be purchased.
Answer: B
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