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 .6. It’s considering building a new $65 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.75 million in perpetuity. The company raises all equity from outside financing. There are three financing options:
1. A new issue of common stock: The required return on the company’s new equity is 15 percent.
2. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7 percent, they will sell at par.
3. Increased use of accounts 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 .15.
(Assume there is no difference between the pretax and aftertax accounts payable cost.)

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