Question
Mesa Media is evaluating a project to help increase sales. The project costs $430,000 and has an IRR equal to 13 percent. The project is
Mesa Media is evaluating a project to help increase sales. The project costs $430,000 and has an IRR equal to 13 percent. The project is divisible, which means any portion can be purchased. Mesa can raise up to $60,000 in new debt at abefore-taxcost (rd) equal to 7 percent; additional debt will cost 10 percent before taxes. Mesa expects to retain $304,000 of its earnings this year to support the purchase of the project. Mesa's cost of retained earnings is 13 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.
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