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 $6.6 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 .65, a cost of equity of 13 percent, and an aftertax cost of debt of 6 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.

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            $

Please show all work.

Explanation / Answer

WACC = (0.65*6 + 1*13)/1.65 + 2

WACC = 12.24%

maximum cost the company would be willing to pay for this project = 6,600,000/(0.1224 - 0.03)

maximum cost the company would be willing to pay for this project = 71,410,023.37

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