Pink, Inc., is considering a project that will result in initial aftertax cash savings of $1.77 million at the end of the first year, and these savings wil grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of 75, a cost of equity of 11.7 percent, and an aftertax cost of debt of 4.5 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g, 1,234,567.89.)
Pink, Inc., is considering a project that will result in initial aftertax cash savings of $1.77 million at the end of the first year, and these savings wil grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of 75, a cost of equity of 11.7 percent, and an aftertax cost of debt of 4.5 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g, 1,234,567.89.)
Chapter9: Capital Budgeting Techniques
Section: Chapter Questions
Problem 7PROB
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Problem 12-16 WACC and NPV
Pink, Inc., is considering a project that will result in Initial aftertax cash savings of $1.77
million at the end of the first year, and these savings will grow at a rate of 1 percent per
year indefinitely. The firm has a target debt-equity ratio of 75, a cost of equity of 11.7
percent, and an aftertax cost of debt of 4.5 percent. The cost-saving proposal is
somewhat riskler than the usual projects the firm undertakes; management uses the
subjective approach and applies an adjustment factor of +2 percent to the cost of capital
for such risky projects.
What is the maximum initial cost the company would be willing to pay for the project?
(Do not round intermedlate calculations and enter your answer in dollars, not millions
of dollars, rounded to 2 decimal places, e.g, 1,234,567.89.)
Maximum cost S
180,986,062.00
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