Pro forma earnings are $7,000 and the dividend payout ratio is 50%, meaning that Bailey’s retained earnings for 2005 are estimated to be $7,000 (1 – 0.5) = $3,500.

The retained earnings break-even point is calculated as follows: $3,500 / 0.70 = $5,000.

Projects B and D are mutually exclusive therefore only the project with the highest NPV is chosen, NPV(D) = 1,102.18. Project A has the next highest NPV(A) = 34.26. The total investment required for projects D and A is $5,000. Therefore, new equity must be issued before considering other projects. The new WACC is 14.36% including the increased cost of 18% for equity. The remaining projects have IRR below the new WACC and their NPVs are negative using the higher WACC. Projects D and A are the only projects that should be accepted.