Vang Enterprises,which Is Debt-Free and Finances Only with Equity from Retained

question 65

Multiple Choice

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: r_RF = 4.50%;RP_M = 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? $$\begin{array} { l l l l l } \text { Project } & \text { Risk } & \text { Risk factor } & \begin{array} { l } \text { Expected } \\\text { return }\end{array} & \text { Cost (millions) } \\\hline 1 & \text { Very low } & - 2.00 \% & 7.60 \% & \$ 25 \\2 & \text { Low } & - 1.00 \% & 9.15 \% & \$ 25 \\3 & \text { Average } & 0.00 \% & 10.10 \% & \$ 25 \\4 & \text { High } & 1.00 \% & 10.40 \% & \$ 25 \\5 & \text { Very high } & 2.00 \% & 10.80 \% & \$ 25 \\6 & \text { Very high } & 2.00 \% & 10.90 \% & \$ 25 \\7 & \text { Very high } & 2.00 \% & 13.00 \% & \$ 25\end{array}$$
?

• A) $100 million
• B) $125 million
• C) $25 million
• D) $50 million
• E) $75 million

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Definitions:

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