A firm is considering a project that will generate perpetual after-tax cash flow

Question

A firm is considering a project that will generate perpetual after-tax cash flows of $25,000 per year beginning next year. The project has the same risk as the firm's overall operations and must be financed externally. Equity flotation costs 15.6 percent and debt issues cost 4.7 percent on an after-tax basis. The firm's D/E ratio is 0.72.

Calculate the WACC of the firm. (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "%" sign in your response.)

What is the most the firm can pay for the project and still earn its required return? (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Calculate the WACC of the firm. (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

1)

WACC = 15.6*1/1.72 + 4.7*0.72/1.72

WACC = 11.04%

2)

Amount the most the firm can pay for the project= 25000/11.037209%

Amount the most the firm can pay for the project= $ 226,507

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