Mesa Media is evaluating a project to help increase sales. The project costs $650,000 and has an IRR equal to 10 percent. The project is divisible, which means any portion can be purchased. Mesa can raise up to $100,000 in new debt at a before-tax cost (rd) equal to 6 percent; additional debt will cost 8 percent before taxes. Mesa expects to retain $472,000 of its earnings this year to support the purchase of the project. Mesa's cost of retained earnings is 11 percent, and its cost of new common equity is 15 percent. Its target capital structure consists of 20 percent debt and 80 percent common equity. If Mesa's marginal tax rate is 40 percent, how much of the project should be purchased? Round your answer to the nearest dollar.

Mesa Media is evaluating a project to help increase sales. The project costs $650,000 and has an IRR equal to 10 percent. The project is divisible, which means any portion can be purchased. Mesa can raise up to $100,000 in new debt at a before-tax cost (rd) equal to 6 percent; additional debt will cost 8 percent before taxes. Mesa expects to retain $472,000 of its earnings this year to support the purchase of the project. Mesa's cost of retained earnings is 11 percent, and its cost of new common equity is 15 percent. Its target capital structure consists of 20 percent debt and 80 percent common equity. If Mesa's marginal tax rate is 40 percent, how much of the project should be purchased? Round your answer to the nearest dollar.

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 5PROB

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