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Graham Co. considers taking a new project that will generate after-tax cash savings of $1.85 million at the end of the first year, and these savings will grow at a rate of 5% per year forever. The company has a target debt/equity ratio of .55, a cost of equity of 15%, and an after-tax cost of debt of 6 percent. Since the cost-saving proposal is riskier than the usual projects Graham Co. takes, managers estimate that the cost of the capital of the new project will be 2.8% higher than that of company’s overall projects. What is the maximum cost of the project that the company should take the new project? Please show your work.

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Financial Management, Finance

Category:- Financial Management
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