Och Inc. is considering a project that will result in initial after-tax cash savings of $4.2 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-to-equity ratio of 0.62, a cost of equity of 11 percent, and an after-tax cost of debt of 4.5 percent. The cost-saving proposal is somewhat riskier than the usual projects 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. What is the maximum initial cost the company would be willing to pay for the project? (In your computations, round the WACC percentage to 2 decimal places. Do not round other intermediate calculations. Round the final answer to the nearest whole dollar amount. Omit $ sign in your response.) Maximum cost $
Och Inc. is considering a project that will result in initial after-tax cash savings of $4.2 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-to-equity ratio of 0.62, a cost of equity of 11 percent, and an after-tax cost of debt of 4.5 percent. The cost-saving proposal is somewhat riskier than the usual projects 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. What is the maximum initial cost the company would be willing to pay for the project? (In your computations, round the WACC percentage to 2 decimal places. Do not round other intermediate calculations. Round the final answer to the nearest whole dollar amount. Omit $ sign in your response.) Maximum cost $
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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Transcribed Image Text:Och Inc. is considering a project that will result in initial after-tax cash savings of $4.2 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-to-equity ratio of 0.62, a cost of equity of 11
percent, and an after-tax cost of debt of 4.5 percent. The cost-saving proposal is somewhat riskier than the usual projects 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.
What is the maximum initial cost the company would be willing to pay for the project? (In your computations, round the WACC
percentage to 2 decimal places. Do not round other intermediate calculations. Round the final answer to the nearest whole dollar
amount. Omit $ sign in your response.)
$
Maximum cost
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