15. Problem 10.19 - Adjusting Cost of Capital for Risk Click here to read the eBook: Adjusting the...

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15. Problem 10.19 - Adjusting Cost of Capital forRisk
Click here to read the eBook: Adjusting the Cost of Capital forRisk
ADJUSTING COST OF CAPITAL FOR RISK
Ziege Systems is considering the following independent projectsfor the coming year:

Project Required
Investment Rate of
Return
Risk
A $4 million 10.75% High
B 5 million 13.25 High
C 3 million 8.75 Low
D 2 million 8.5 Average
E 6 million 11.75 High
F 5 million 11.75 Average
G 6 million 6.5 Low
H 3 million 10.25 Low
Ziege's WACC is 9.25%, but it adjusts for risk by adding 2% tothe WACC for high-risk projects and subtracting 2% for low-riskprojects.
Which projects should Ziege accept if it faces no capitalconstraints?
Project A -Select-AcceptRejectItem 1
Project B -Select-AcceptRejectItem 2
Project C -Select-AcceptRejectItem 3
Project D -Select-AcceptRejectItem 4
Project E -Select-AcceptRejectItem 5
Project F -Select-AcceptRejectItem 6
Project G -Select-AcceptRejectItem 7
Project H -Select-AcceptRejectItem 8
If Ziege can only invest a total of $13 million, which projectsshould it accept?
Project A -Select-AcceptRejectItem 9
Project B -Select-AcceptRejectItem 10
Project C -Select-AcceptRejectItem 11
Project D -Select-AcceptRejectItem 12
Project E -Select-AcceptRejectItem 13
Project F -Select-AcceptRejectItem 14
Project G -Select-AcceptRejectItem 15
Project H -Select-AcceptRejectItem 16
If Ziege can only invest a total of $13 million, what would bethe dollar size of its capital budget? Round your answer to twodecimal places. Enter your answer in millions. For example, ananswer of $10,550,000 should be entered as 10.55.
$ ? million
Suppose Ziege can raise additional funds beyond the $13 million,but each new increment (or partial increment) of $5 million of newcapital will cause the WACC to increase by 1%. Assuming that Ziegeuses the same method of risk adjustment, which projects should itnow accept?
Project A -Select-AcceptRejectItem 18
Project B -Select-AcceptRejectItem 19
Project C -Select-AcceptRejectItem 20
Project D -Select-AcceptRejectItem 21
Project E -Select-AcceptRejectItem 22
Project F -Select-AcceptRejectItem 23
Project G -Select-AcceptRejectItem 24
Project H -Select-AcceptRejectItem 25
What would be the dollar size of its capital budget? Round youranswer to two decimal places. Enter your answer in millions. Forexample, an answer of $10,550,000 should be entered as 10.55.
$ ? million

Answer & Explanation Solved by verified expert

3.7 Ratings (495 Votes)

Project	Investment	Return	Risk	WACC	Select
A	4 million	10.75%	High	11.25%	No
B	5 million	13.25	High	11.25%	Yes
C	3 million	8.75	Low	7.25%	Yes
D	2 million	8.5	Average	9.25%	No
E	6 million	11.75	High	11.25%	Yes
F	5 million	11.75	Average	9.25%	Yes
G	6 million	6.5	Low	7.25%	No
H	3 million	10.25	Low	7.25%	Yes

Select projects if returns are greater than WACC.

With capital constraints, select the projects with maximum difference of Returns - WACC.

Project	Investment	Return	Risk	WACC	Select
A	4 million	10.75%	High	11.25%	No
B	5 million	13.25%	High	11.25%	Yes
C	3 million	8.75%	Low	7.25%	No
D	2 million	8.50%	Average	9.25%	No
E	6 million	11.75%	High	11.25%	No
F	5 million	11.75%	Average	9.25%	Yes
G	6 million	6.50%	Low	7.25%	No
H	3 million	10.25%	Low	7.25%	Yes

With additional capital, only c can be added.

Project	Investment	Return	Risk	WACC	Select
A	4 million	10.75%	High	11.25%	No
B	5 million	13.25%	High	11.25%	Yes
C	3 million	8.75%	Low	8.25%	Yes
D	2 million	8.50%	Average	9.25%	No
E	6 million	11.75%	High	11.25%	No
F	5 million	11.75%	Average	9.25%	Yes
G	6 million	6.50%	Low	7.25%	No
H	3 million	10.25%	Low	7.25%	Yes

Capital Budget = 16 million

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15. Problem 10.19 - Adjusting Cost of Capital forRiskClick here to read the eBook: Adjusting the Cost of Capital forRiskADJUSTING COST OF CAPITAL FOR RISKZiege Systems is considering the following independent projectsfor the coming year:ProjectRequiredInvestmentRate ofReturnRiskA$4 million10.75%HighB5 million13.25HighC3 million8.75LowD2 million8.5AverageE6 million11.75HighF5 million11.75AverageG6 million6.5LowH3 million10.25LowZiege's WACC is 9.25%, but it adjusts for risk by adding 2% tothe WACC for high-risk projects and subtracting 2% for low-riskprojects.Which projects should Ziege accept if it faces no capitalconstraints?Project A-Select-AcceptRejectItem 1Project B-Select-AcceptRejectItem 2Project C-Select-AcceptRejectItem 3Project D-Select-AcceptRejectItem 4Project E-Select-AcceptRejectItem 5Project F-Select-AcceptRejectItem 6Project G-Select-AcceptRejectItem 7Project H-Select-AcceptRejectItem 8If Ziege can only invest a total of $13 million, which projectsshould it accept?Project A-Select-AcceptRejectItem 9Project B-Select-AcceptRejectItem 10Project C-Select-AcceptRejectItem 11Project D-Select-AcceptRejectItem 12Project E-Select-AcceptRejectItem 13Project F-Select-AcceptRejectItem 14Project G-Select-AcceptRejectItem 15Project H-Select-AcceptRejectItem 16If Ziege can only invest a total of $13 million, what would bethe dollar size of its capital budget? Round your answer to twodecimal places. Enter your answer in millions. For example, ananswer of $10,550,000 should be entered as 10.55.$ ? millionSuppose Ziege can raise additional funds beyond the $13 million,but each new increment (or partial increment) of $5 million of newcapital will cause the WACC to increase by 1%. Assuming that Ziegeuses the same method of risk adjustment, which projects should itnow accept?Project A-Select-AcceptRejectItem 18Project B-Select-AcceptRejectItem 19Project C-Select-AcceptRejectItem 20Project D-Select-AcceptRejectItem 21Project E-Select-AcceptRejectItem 22Project F-Select-AcceptRejectItem 23Project G-Select-AcceptRejectItem 24Project H-Select-AcceptRejectItem 25What would be the dollar size of its capital budget? Round youranswer to two decimal places. Enter your answer in millions. Forexample, an answer of $10,550,000 should be entered as 10.55.$ ? million