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Question
Marvelous Manufacturing (MM) generated the following information for its capital budgeting manager:
Capital Structure
Project Cost IRR Type of Capital Proportion
W $65,000 15% Debt 30%
X 70,000 13 Common equity 70
Y 75,000 12
Z 70,000 11
MM's weighted average cost of capital (WACC) is 12 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 16 percent. If MM expects to generate $70,000 in retained earnings this year, which project(s) should be purchased? Assume that the projects are independent and indivisible.
a. Only Project W should be purchased.
b. Projects W and X should be purchased.
c. Projects W, X, and Y should be purchased.
d. All of the projects should be purchased.
e. None of the projects should be purchased.
Answer
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