Answer:
How much capital should Firm A raise and invest?
$296.08 million should be raised and invested in projects.
Explanation:
WACC = 8% when A's retained earnings breakeven point = $296.08 million
Expected rate of return = 8.25%
WACC is less than expected rate of return.
Therefore, WACC is less than expected rate of return, which is beneficial, since cost of capital is less than expected rate of return.
therefore, $296.08 million should be raised.
If the firm A raises, more than $296.08 million, <u>WACC</u> would be <u>increasing</u> to <u>8.5%</u>, this is greater than the <u>expected rate of return i.e. 8.25%. </u>
Hence raising amount <u>more than $296.08 million</u> will not be beneficial.
Hence it is clear that amount which should be raised and invested =$296.08 million.
Investment required in one project=$29.608 million.
Number of projects which can be started =$296.08/$29.608 =10 projects
All are equally risky therefore it does not matter which project should be left.
Hence, $296.08 million should be raised and invested in projects.
