3. CAPM and the optimal capital budget
Ballack Inc. is a 100% equity finance company (no debt or preferred stock); hence, its WACC equals its costs of common equity. Ballack's retained earnings will be sufficient to fund its capital budget in the future, The company has a beta of 1.5, the risk free rate is 6.0% and the market risk premium is 5.0% - what is Ballack's WACC
13.50%, 13.70%, 13.90%, 13.05% 13.65%
Project Required Investment Expected rate of return
W 1,000 13.65
X 2,000 14.60
Y 3,000 13.10
Z 4,000 14.10
Each project has average risk, and Ballack accepts any project whose expected rate of return exceeds its cost of capital - how large should next year's capital budget be?
The expert examines CAPM and the optimal capital budget for Ballack Inc.