Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $5.4 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 .53, a cost of equity of 13.3 percent, and an aftertax cost of debt of 6.7 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 +2 percent to the cost of capital for such risky projects. 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. What is the maximum cost the company would be willing to pay for this project?
Problem 12-21 WACC and NPV [LO 4]
Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $5.4 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 .53, a
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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.
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What is the maximum cost the company would be willing to pay for this project?
Note: Do not round
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