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. 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 $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. 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 %
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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M2
![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.
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
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbe4d1632-31b6-4892-8e05-e87dfc6ed999%2Ffe0e71e8-4396-4ec7-9026-e15aa41035e3%2F7zd8o2n_processed.png&w=3840&q=75)
Transcribed Image Text: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.
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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