Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.70 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 0.85, a cost of equity of 11.0 percent, and an aftertax cost of debt of 3.8 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? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Maximum cost
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.70 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 0.85, a cost of equity of 11.0 percent, and an aftertax cost of debt of 3.8 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? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Maximum cost
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.70
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 0.85, a cost of equity of 11.0
percent, and an aftertax cost of debt of 3.8 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?
(Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round
intermediate calculations and round your final answer to the nearest whole dollar
amount.)
Maximum cost
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