1. Ballack Inc. is a 100% equity-financed company (no debt or preferred stock). Its WACC equals its costs of common equity, their retained earnings will be sufficient to fund its capital budget in the foreseeable future. Their beta of 1.4 the risk-free rate of 6.0% and the market premium is 5.5%. What is their WACC?
2. They are considering the following projects for next year:
Project Requires investment Expected rate of return
W $1,000 13.65%
X $2,000 14.10%
Y $3,000 13.10%
Z $4,000 14.60%
Each project has average risk, they accept any project whose expected rate of return exceed its cost of capital. How large should next years capital budget be?
The problem set deals with capital budgeting: determining appropriate investments to make.