Hankins, Inc., is considering a project that will result in initial aftertax cas

Question

Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $5.2 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt–equity ratio of .51, a cost of equity of 13.1 percent, and an aftertax cost of debt of 6.5 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 +3 percent to the cost of capital for such risky projects.

Calculate the WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
WACC             %

What is the maximum cost the company would be willing to pay for this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Present value            $

Explanation / Answer

WACC = wd x kd + we x ke

= 0.51 / (1 + 0.51) x 6.5% + 1 / (1 + 0.51) x 13.1%

= 10.87%

For this project, WACC = 10.87% + 3% = 13.87%

Max. cost = CF1 / (WACC - g) = 5.2 / (13.87% - 3%) = 47,838,086.48

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