Based on market values, Gubler's Gym has an equity multiplier of 1.45 times. Shareholders require a return of 10.87 percent on the company's stock and a pretax return of 4.83 percent on the company's debt. The company is evaluating a new project that has the same risk as the company itself. The project will generate annual aftertax cash flows of $275,000 per year for 6 years. The tax rate is 35 percent. What is the most the company would be willing to spend today on the project

The most the company would be willing to spend today on the project is

$1,253,529

Explanation:

In order to calculate What is the most the company would be willing to spend today on the project we woule require to calculate first the cost of capital as follows:

cost of capital=(1-1/1.45)*4.83%*(1-35%)+(1/1.45)*10.87%

cost of capital=0.01498*0.65+0.0749=0.084637=8.4637%

Therefore, Maximum amount to be spent=$275,000/8.4637%*(1-1/(1+8.4637%)^6)=$1,504,124.98

Maximum amount to be spent=$1,253,529

The most the company would be willing to spend today on the project is

$1,253,529

answer; ///it you learn new things that will better your performance;