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Category > Management Posted 13 Mar 2018 My Price 7.00

Ziege Systems

Adjusting cost of capital for risk

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

Project Required
Investment		 Rate of
Return		 Risk
A $4 million 14.5% High
B 5 million 12 High
C 3 million 10 Low
D 2 million 10 Average
E 6 million 13 High
F 5 million 13 Average
G 6 million 8 Low
H 3 million 11.75 Low

Ziege's WACC is 10.50%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

  1. Which projects should Ziege accept if it faces no capital constraints?

    Project A Item 1 accept or reject
    Project B Item 2 accept or reject
    Project C Item 3 accept or reject
    Project D Item 4 accept or reject
    Project E Item 5 accept or reject
    Project F Item 6 accept or reject
    Project G Item 7 accept or reject
    Project H Item 8 accept or reject

  2. If Ziege can only invest a total of $13 million, which projects should it accept?

    Project A accept or reject Item 9
    Project B Item 10 accept or reject
    Project C Item 11 accept or reject
    Project D Item 12 accept or reject
    Project E Item 13 accept or reject
    Project F Item 14 accept or reject
    Project G Item 15 accept or reject
    Project H Item 16 accept or reject

    If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.

    $ million

  3. 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?

    Project A Item 18 accept or reject
    Project B Item 19 accept or reject
    Project C Item 20 accept or reject
    Project D Item 21 accept or reject
    Project E Item 22 accept or reject
    Project F Item 23 accept or reject
    Project G Item 24 accept or reject
    Project H Item 25 accept or reject

    What would be the dollar size of its capital budget? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.

    $ million

Answers

Maurice Tutor
(5)
Status NEW Posted 13 Mar 2018 11:03 AM My Price 7.00

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