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: rRF = 4.50%; RPM = 5.50%; and b = 0.92. 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?

Question

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: rRF = 4.50%; RPM = 5.50%; and b = 0.92. 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?

Answer 1

I don't see any data. If you tried to copy and paste this website doesn't allow that except for the tutors.

Answer 2

To determine the size of the capital budget, we need to evaluate the risk of the projects and calculate their expected returns. We can then compare these returns to the company's required rate of return to determine which projects are acceptable.

Let's begin by calculating the required rate of return (RRR) for the company using the Capital Asset Pricing Model (CAPM):

RRR = rRF + (RPM × b)

where:
rRF = risk-free rate of return (4.50% in this case)
RPM = equity risk premium (5.50% in this case)
b = beta of the company (0.92 in this case)

Substituting the values, we get:
RRR = 4.50% + (5.50% × 0.92)
RRR = 10.22%

Now, let's evaluate the expected return for each project using the following formula:

Expected Return = RRR + (Risk Adjustment × Benchmark Return)

The Risk Adjustment is the percentage added or subtracted from the corporate WACC for projects with above- or below-average risk. Since we don't have this information, we assume it to be 0% for all projects.

The Benchmark Return is the company's corporate WACC, which we assume to be the same as the RRR calculated earlier (10.22%).

Using these assumptions, the expected return for each project would be:

Project 1:
Expected Return = 10.22% + (0% × 10.22%)
Expected Return = 10.22%

Repeat this calculation for all 7 projects.

Once you have calculated the expected return for each project, compare them to the RRR to determine which projects are acceptable. Projects with expected returns greater than or equal to the RRR should be accepted.

Lastly, sum up the costs of all the acceptable projects to determine the size of the capital budget.

Note: Since we don't have the actual data for the projects, I cannot provide the specific calculations. However, using the given information, you can follow the process mentioned above to determine the capital budget.