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Problem:

Retniw Inc. is evaluating a new project that will cost $30 million. This project will result in estimated before-tax cost savings of $6 million at the enf of the first year, and these savings are expected to grow at a rate of 2% per year indefinitely. The first would like to keep its debt-equty ratio at 0.8. Its cost of equity is 18% and its before-tax cost of debt is 10%. Retniw's marginal tax rate is 40%.

Required:

Question 1: What are the target weights on debt and equity for Retniw Inc?

Question 2: What is the weighted cost of capital for Retniw Inc.

Question 3: Using the weighted cost of capital for Retniw Inc., calculate the Net present value of this project.

Question 4: Should Retniw Inc invest in this new project ? why or why not?

Note: Provide support for rationale.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91167189

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