Vang Enterprises, which is debt-free and finances only with equity from retained earnings, is considering 7 equal-sized capital budgeting projects. Its CFO hired you to assist in deciding whether none, some, or all of the projects should be accepted. You have the following information: rRF = 4.50%; RPM = 5.50%; and b = 0.98. The company adds or subtracts a specified percentage to the corporate WACC when it evaluates projects that have above- or below-average risk. Data on the 7 projects are shown below. If these are the only projects under consideration, how large should the capital budget be? Expected Project Risk Risk factor return Cost (millions) 1 Very low -2.00% 7.60% $25 2 Low -1.00% 9.15% $25 3 Average 0.00% 10.10% $25 4 High 1.00% 10.40% $25 5 Very high 2.00%
10.80% $25 6 Very high 2.00% 10.90% $25 7 Very high 2.00% 13.00% $25 ?
A. $100 million
B. $125 million
C. $25 million
D. $50 million
E. $75 million
Answer: E
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