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Ziege Systems is considering the following independent projects for the coming year:
Project Retained investment Rate of Return Risk
A $4 million 14.0% High
B 5 million 11.5 High
C 3 million 9.5 Low
D 2 million 9.0 Average
E 6 million 12.5 High
F 5 million 12.5 Average
G 6 million 7.0 Low
H 3 million 11.5 Low
Ziege's WACC is 10%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.
a) Which projects should Ziege accept if it faces no capital constrains?
b) If Ziege can only invest a total of $13 million, which projects should it accept and what would be the dollar size of its capital budget?
c) 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 and what would be the dollar size of its capital budget?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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