Och SpA is considering a project that will result in initial after-tax cash savings of 3.5 million
Question:
Och SpA is considering a project that will result in initial after-tax cash savings of €3.5 million at the end of the first year, and these savings will grow at a rate of 5 per cent per year indefinitely. The firm has a target debt–equity ratio of 0.65, a cost of equity of 15 per cent, and an after-tax cost of debt of 5.5 per cent. 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 + 2 per cent to the cost of capital for such risky projects. Under what circumstances should Och take on the project?
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe