Business, 13.10.2020 03:01 21121212cutecheytown

Hankins, Inc., is considering a project that will result in initial after tax cash savings of $4.3 million at the end of the first year, and these savings will grow at a rate of 1.9 percent per year indefinitely. The firm has a target debt-equity ratio of .40, a cost of equity of 10.8 percent, and an aftertax cost of debt of 3.2 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. Required:
a. Calculate the discount rate for the project.
b. What is the maximum cost the company would be willing to pay for this project?

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Hankins, Inc., is considering a project that will result in initial after tax cash savings of $4.3 m...

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