Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of

Question:

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 0.8. It’s considering building a new $80 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $10.9 million in perpetuity. The company raises all equity from outside financing. There are three financing options:

(a) A new issue of common stock: The required return on the company’s new equity is 17 percent.

(b) A new issue of 20-year bonds; if the company issues these new bonds at an annual coupon rate of 9 percent, they will sell at par.

(c) Increased use of account payable financing; because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of 0.20.

What is the NPV of the new plant? Assume that the company has a 35 percent tax rate.

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