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
Jensen Shipping is considering a project that has an initial cost of $218,000. The project will produce aftertax cash flows of $49,000 a year forever. The firm's WACC is 15.8 percent and its tax rate is 34 percent. Equity has a flotation cost of 14.0 percent while the flotation cost for debt is 2.0 percent. What is the net present value of this project, including the flotation costs, if the firm's debt-equity ratio is .5? (Rounded) Multiple Choice $62,501 $53,088 $47,088 $67,904
galbraith co. is considering a four-year project that will require an initial investment of $12,000. the base-case cash flows for this project are projected to be $12,000 per year. the best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be –$3,000 per year. the company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. the analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. what would be the expected net present value (npv) of this project if the project’s cost of capital is 11%?
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
Television is considering a project with an initial outlay of $X (you will have to determine this amount). It is expected that the project will produce a positive cash flow of $54,000 a year at the end of each year for the next 13 years. The appropriate discount rate for this project is 8 percent. If the project has an internal rate of return of 13 percent, what is the project's net present value? *** a. If the project has an internal rate of return of 13%, then the project's initial outlay is $ the nearest cent.) (Round to
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ABC Corp is considering a new project: the project requires an initial cost of $375,000, and will not produce any cash flows for the first two years. Starting in year 3, the project will generate cash inflows of $528,000 a year for three years. This project has higher risk compared to other projects the firm has, so it is assigned with a discount rate of 18%. What is the project's net present value? $773,016.1 $218,693.6 $449,487.3 $824,487.3 Oa b. C₂ d.
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the cost of capital for the firm's levered equity is closest to:
ThreeRivers Corp. is considering the purchase of a new piece of equipment with a life of 12 years. The internal rate of return of the project is 20%. ThreeRivers has a required rate of return (hurdle rate) of 17%. The project would have: Multiple Choice a net present value greater than zero. a payback period more than 12 years. a net present value of zero. an accounting rate of return greater than 17%.

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