Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $6.7 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .66, a cost of equity of 13.1 percent, and an aftertax cost of debt of 6.1 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. a. Calculate the required return for the project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the maximum cost the company would be willing to pay for this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. a. Project required return b. Maximum to pay %
Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $6.7 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .66, a cost of equity of 13.1 percent, and an aftertax cost of debt of 6.1 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. a. Calculate the required return for the project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the maximum cost the company would be willing to pay for this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. a. Project required return b. Maximum to pay %
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...
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