Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Ariana, Incorporated, is considering a project that will result
in initial aftertax cash savings of $6.7 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 .66, a cost of equity of 13.1 percent, and an aftertax cost of
debt of 6.1 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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Transcribed Image Text:Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $6.7 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 .66, a cost of equity of 13.1 percent, and an aftertax cost of debt of 6.1 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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