Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $5.3 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 .52, a cost of equity of 13.2 percent, and an aftertax cost of debt of 6.6 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 1 percent to the cost of capital for such risky projects. Required:a. Calculate the WACC. b. What is the maximum cost the company would be willing to pay for this project?

a.

WACC - Company = 10.94%

WACC - Project = 11.94%

b.

The maximum that the company will be willing to pay for this project is $61.0626 million

Explanation:

a.

To calculate the maximum cost that the company will be willing to pay today, we first need to find out the company and project WACC.

The WACC or weighted average cost of capital is the cost of a company's capital structure. It is calculated as follows,

WACC = wD * rD * (1 - tax rate)  +  wP * rP  +  wE * rE

Where,

Weightage of  debt and equity

Total assets = debt + equity

Total assets = 0.52 + 1  = 1.52

wD = 0.52/1.52

wE = 1/1.52

WACC - Company = 0.52/1.52 * 0.066  +  1/1.52 * 0.132

WACC - Company = 0.1094 or 10.94%

WACC of project is 1% more than WACC of company. So WACC of project is 10.94% + 1%  =  11.94%

b.

The maximum that must be paid for this project can be calculated by calculating the present value of the cash flows provided in form of saving by this project.

Using the constant growth model of cash flow approach,

Present value = 5.3 * (1+0.03) / (0.1194 - 0.03)

Present value = $61.0626 million

you can lose ranking 2 ways.

1) you don't have enough points due to you expending them by asking questions/your answers are deleted.

2) your brainliest's expired. this means that brainliests, once they exceed the 30 day limit, expires. this is to ensure that you continue to contribute into the community at a constant rank if you want to continue to have/exceed the rank you have right now.

if you go to profile, and click "show more information" located on the bottom left of the box with your information (on top of the questions answered, questions asked, and friends), you will be given the following information (example):

member since : 02/13/2017, 18: 11

questions answered: 9741

questions asked: 162

no. of brainliest answers: 1575

brainliest answers in last 30 days: 10

warnings: 0 view

questions/answers reported: 2637

questions/answers incorrectly reported: 64

look at the "brainliest answers in the last 30 days". this is the one that will affect your rank other than your points. again, once your brainliest expires (was earned 31+ days ago), it will not be counted.

~

1) the stages a new product goes through from beginning to end, i.e., the stages that a product passes through from introduction through growth, maturity, and decline. 2) the time from initial research and development to the time at which sales and support of the product to customers are withdrawn. 3) the period of time during which a product can be produced and marketed profitably.

                                          hope it