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?