Question

Based on market values, Gubler's Gym has an equity multiplier of 1.46 times. Shareholders require a return of 10.91 percent on the company's stock and a pretax return of 4.84 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 aftertax cash flows of $277,000 per year for 7 years. The tax rate is 39 percent. What is the most the company would be willing to spend today on the project

Answer 1

The answer is "5.4% and 15,23,500".

Step-by-step explanation:

Calculating the capital cost:

`=(1-(1)/(1.46))* 10.91\% * (1-39\%)+((1)/(1.46))* 4.84\% \\\\=((1.46-1)/(1.46))* (10.91)/(100) * ((100-39)/(100))+((1)/(1.46))* (4.84)/(100) \\\\ =((0.46)/(1.46))* (10.91)/(100) * ((61)/(100))+((1)/(1.46))* (4.84)/(100) \\\\=(306.1346)/(14600)+(4.84)/(146) \\\\= 0.021+0.033 \\\\ =0.054\\\\= 5.4\%`

Maximum amount to be spent

`=(277,000* 100 )/(5.4) * (1-(1)/((1.054)^7))\\\\=(277,000* 100 )/(5.4) * (1-(1)/(1.44))\\\\=(277,000* 100 )/(5.4) * (1-0.7)\\\\=277,000 * 100* 0.055\\\\=\$15,23,500\\`