The Cost of Capital, The Basics of Capital Budget, Cash Flow Estimation and Risk Analysis

Ballack Inc. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Ballanck’s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.7, the risk-free is 6%, and the market risk premium is 4.5%. What is Ballack’s WACC?

13.25%
13.70%
13.55%
13.90%
13.65%

Ballack is considering the following projects for investment next eyar:

ProjectRequired InvetmentExpected Rate of Return
W$1,00013.10%
X$2,00014.10%
Y$3,00013.60%
Z$4,00014.60%

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?

$9,000
$6,000
$7,000
$8,000
$5,000

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