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Optimal capital budget

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Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at \$2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects. Assume that each of these projects is independent and that each is just as risky as the firm's existing assets.

Which set of projects should be accepted, and what is the firm's optimal capital budget?

Project Size IRR
A \$650,000 14.0%
B \$1,050,000 13.5%
C \$1,000,000 11.2%
D \$1,200,000 11.0%
E \$500,000 10.7%
F \$650,000 10.3%
G \$700,000 10.2%

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Solution Summary

Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at \$2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects. Assume that each of these projects is independent and that each is just as risky as the firm's existing assets.

Which set of projects should be accepted, and what is the firm's optimal capital budget?

Project Size IRR
A \$650,000 14.0%
B \$1,050,000 13.5%
C \$1,000,000 11.2%
D \$1,200,000 11.0%
E \$500,000 10.7%
F \$650,000 10.3%
G \$700,000 10.2%

\$2.19