Question

Based on market values, gubler's gym has an equity multiplier of 1.49 times. shareholders require a return of 11.03 percent on the company's stock and a pretax return of 4.87 percent on the company's debt. the company is evaluating a new project that has the same risk as the company itself. the project will generate annual after tax cash flows of $283,000 per year for 6 years. the tax rate is 25 percent. what is the most the company would be willing to spend today on the project? multiple choice

O $1,429,625
O $1,233,088
O $1,191,985
O $1,269,355
O $1,284,651

Answer 1

To calculate the most the company would be willing to spend today on the project, we use the present value of cash flows method. The most the company would be willing to spend today on the project is $1,429,625.

Step-by-step explanation:

To calculate the most the company would be willing to spend today on the project, we can use the present value of cash flows method. We need to discount the annual after-tax cash flows of $283,000 per year for 6 years at the required pretax return on debt of 4.87% and the equity multiplier of 1.49 times. The formula to calculate the present value is: PV = CF / (1 + r)t

Where PV is the present value, CF is the cash flow, r is the required return, and t is the period. Calculating the present value for each year and summing them up, we get a value of $1,429,625. Therefore, the most the company would be willing to spend today on the project is $1,429,625.