Question: Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $6.3 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .62, a cost of equity of 13.2 percent, and an aftertax cost of debt of 5.7 percent. 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 percent to the cost of capital for such risky projects.
1) Calculate the WACC.
2) What is the maximum cost the company would be willing to pay for this project?