Scaling, Inc., is considering a project that will result in initial after tax ca

Question

Scaling, Inc., is considering a project that will result in initial after tax cash savings of $1.81 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 0.75, a cost of equity of 12.1 percent, and an after tax cost of debt of 4.9 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.)

Explanation / Answer

WACC = 3/7 * 4.9 + 4/7 * 12.1 = 9.014%
Cost of Capital for risky projects(r) = WACC + 2% = 11.014%

Maximum initial cost = $1.81 mn / (r-g) = 1.81 / 0.10014 = $18.074 millions

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.