Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $6.1 million at the end of the first year, andthese savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .60, a cost of equity of 13percent, and an aftertax cost of debt of 5.5 percent. The cost-saving proposal is somewhat riskier than the usual project the firmundertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for suchrisky 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 returnb. Maximum to pay13.19 %

Step B: Calculate the Maximum Cost the Company Would Be Willing to Pay for the Project To find the…

Answered: Ariana, Incorporated, is considering a…

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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Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $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 .69, a cost of equity of 13.4 percent, and an aftertax cost of debt of 6.4 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.
Elizabeth Corporation is starting two new projects. Project A requires an investment of $5,000, has expected return of 16% with standard deviation 14%. Project B has initial investment of $15,000, expected return of 15% with standard deviation 10%. The correlation coefficient between the projects is 0.75. Find the expected return, in dollars, of the portfolio of these two projects. What is the probability that this return is less than $4,000? COMPLETE AND SHOW WORK IN EXCEL
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You are considering opening a new plant. The plant will cost $96.2 million upfront and will take one year to build. After that, it is expected to produce profits of $30.2 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.2%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule? Here is the cash flow timeline for this problem: Years Cash Flow ($ million) 0 -96.2 1 2 + 30.2 3 30.2 4 30.2 Forever 30.2
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Your firm is considering a project that will cost $4.59 million up front, generate cash flows of $3.52 million per year for 3 years, and then have a cleanup and shutdown cost of $6.01 million in the fourth year. a. How many IRRS does this project have? b. Calculate a modified IRR for this project assuming a discount and compounding rate of 9.9%.

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