Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $6.2 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 .61, a cost of equity of 13.1 percent, and an aftertax cost of debt of 5.6 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 +1 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 $6.2 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 .61, a cost of equity of 13.1 percent, and an aftertax cost of debt of 5.6 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 +1 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 %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
A 213.
Transcribed Image Text:Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings
of $6.2 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 .61, a cost of equity
of 13.1 percent, and an aftertax cost of debt of 5.6 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 +1 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
%
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