Problem 14-20 WACC and NPV [LO3, 5] Leblanc, Incorpated, is considering a project that will result in initial aftertax cash savings of $1.9 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of .75, a cost of equity of 13 percent, and an aftertax cost of debt of 5.8 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. What is the maximum initial cost the company would be willing to pay for the project? Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567. Maximum cost $ 17,400,000
Problem 14-20 WACC and NPV [LO3, 5] Leblanc, Incorpated, is considering a project that will result in initial aftertax cash savings of $1.9 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of .75, a cost of equity of 13 percent, and an aftertax cost of debt of 5.8 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. What is the maximum initial cost the company would be willing to pay for the project? Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567. Maximum cost $ 17,400,000
Chapter10: Project Cash Flows And Risk
Section: Chapter Questions
Problem 16PROB
Related questions
Question
![Problem 14-20 WACC and NPV [LO3, 5]
Leblanc, Incorpated, is considering a project that will result in initial
aftertax cash savings of $1.9 million at the end of the first year, and
these savings will grow at a rate of 1 percent per year indefinitely.
The firm has a target debt-equity ratio of .75, a cost of equity of 13
percent, and an aftertax cost of debt of 5.8 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. What is the maximum initial cost the company would
be willing to pay for the project?
Do not round intermediate calculations and enter your answer in
dollars, not millions of dollars, rounded to the nearest whole
number, e.g., 1,234,567.
Maximum cost
$
17,400,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3b3e830f-8849-4471-af63-d712d359fedc%2F8bf64cb1-d6ab-467f-850f-b36406e154e2%2F0awswd_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 14-20 WACC and NPV [LO3, 5]
Leblanc, Incorpated, is considering a project that will result in initial
aftertax cash savings of $1.9 million at the end of the first year, and
these savings will grow at a rate of 1 percent per year indefinitely.
The firm has a target debt-equity ratio of .75, a cost of equity of 13
percent, and an aftertax cost of debt of 5.8 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. What is the maximum initial cost the company would
be willing to pay for the project?
Do not round intermediate calculations and enter your answer in
dollars, not millions of dollars, rounded to the nearest whole
number, e.g., 1,234,567.
Maximum cost
$
17,400,000
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 2 images
Recommended textbooks for you