Durst Enterprises, Which Is Debt-Free and Finances Only with Equity

question 70

Multiple Choice

Durst Enterprises, which is debt-free and finances only with equity from retained earnings, is considering five large capital budgeting projects. Its CFO hired you to assist in deciding whether none, one, two, three, four, or five projects should be accepted. You have the following information: - rRF = 4.00%; RPM = 5.50%; and b = 1.00.
- The company adds 5%, 3%, 1%, 0%, or -1% to the corporate WACC when it evaluates projects that differ in risk.
- Project A is in the -1% category, B is in the 0% group, C is in the +1% group, D is in the +3%
Group, and E is in the most risky +5% group.
- Each project has a cost of $25,000. (5) The projects' expected returns are as follows: A = 8.7%, B =
9) 60%, C = 10.30%, D = 13.80%, and E = 14.70%. If these are the only projects under consideration, how large should Durst's capital budget be?

• A) $100,000
• B) $75,000
• C) $50,000
• D) $25,000

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Definitions:

Additional Business Capital

Extra funds that are invested in a business to fuel its growth, cover operational costs, or expand its operations.

Borrowing Funds

The act of obtaining money from another party, typically a financial institution, under the agreement to repay it, often with interest, at a later date.

Bringing in Partners

The process of adding one or more individuals as business partners, typically to share ownership, responsibilities, and benefits of operating a business.

Sole Proprietorship

A business owned and operated by a single individual, where there is no legal distinction between the owner and the business.