Problem 14-20 WACC and NPV [LO3, 5] Lebleu, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.85 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 .85, a cost of equity of 12.5 percent, and an aftertax cost of debt of 5.3 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, rounded to the nearest whole number, e.g., 1,234,567.) Maximum cost
Problem 14-20 WACC and NPV [LO3, 5] Lebleu, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.85 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 .85, a cost of equity of 12.5 percent, and an aftertax cost of debt of 5.3 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, rounded to the nearest whole number, e.g., 1,234,567.) 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
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![Problem 14-20 WACC and NPV [LO3, 5]
Lebleu, Incorporated, is considering a project that will result in initial aftertax cash
savings of $1.85 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 .85, a cost of
equity of 12.5 percent, and an aftertax cost of debt of 5.3 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, rounded to the nearest whole number, e.g., 1,234,567.)
Maximum cost](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F501faa81-9f86-4843-98b4-6dc52300022d%2F6ccb76ad-e291-4415-b803-e0e7c6f16be5%2Ffkyqz8y_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 14-20 WACC and NPV [LO3, 5]
Lebleu, Incorporated, is considering a project that will result in initial aftertax cash
savings of $1.85 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 .85, a cost of
equity of 12.5 percent, and an aftertax cost of debt of 5.3 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, rounded to the nearest whole number, e.g., 1,234,567.)
Maximum cost
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