Your firm is analyzing a project that will result in aftertax cash savings of $250,000 per year, starting next year. These savings will increase by 3%/year, forever. Your firm has a target debt-to-equity ratio of 0.65. The company's stock is currently trading at $52/share, recently paid a $1.80/share dividend, and dividend payments have been growing at 4.2%/year. The aftertax cost of debt is 5.5% and TC is 35%. Since this project is less risky than usual, management will apply an adjustment factor of -1.0% to the cost of capital for this project. What is the maximum cost of the project to accept it?
Your firm is analyzing a project that will result in aftertax cash savings of $250,000 per year, starting next year. These savings will increase by 3%/year, forever. Your firm has a target debt-to-equity ratio of 0.65. The company's stock is currently trading at $52/share, recently paid a $1.80/share dividend, and dividend payments have been growing at 4.2%/year. The aftertax cost of debt is 5.5% and TC is 35%. Since this project is less risky than usual, management will apply an adjustment factor of -1.0% to the cost of capital for this project. What is the maximum cost of the project to accept it?
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:Your firm is analyzing a project that will result in aftertax cash savings of $250,000 per year, starting next year.
These savings will increase by 3%/year, forever. Your firm has a target debt-to-equity ratio of 0.65. The
company's stock is currently trading at $52/share, recently paid a $1.80/share dividend, and dividend payments
have been growing at 4.2%/year. The aftertax cost of debt is 5.5% and TC is 35%. Since this project is less risky
than usual, management will apply an adjustment factor of -1.0% to the cost of capital for this project. What is
the maximum cost of the project to accept it?
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