Caste Corporation considers its optimal capital structure to be 40 percent debt and 60 percent common stock. Caste can borrow unlimited amounts at 15 percent. The common stock can be issued with a required return of 20%. Caste has a tax rate of 30 percent. ?Caste is considering four investment proposals:???
Expected ?Level of? Investment
Project ?? Return? ? Risk? ?Required
A ?? 25%??High? $100,000,000
B?? 12%??Ave? $60,000,000
C ?? 16%??Ave? $200,000,000
D?? 8%??Low $20,000,000
When Caste evaluates a project, they consider the level of risk. If the risk level is high, Caste adds a premium of four percent to the WACC. If the risk level is low, Caste subtracts two percent.
a) Determine Caste weighted average cost of capital (WACC).
b) Determine Caste optimal capital budget.