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 .35. It’s considering building a new $37 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.1 million in perpetuity. There are three financing options:
a. A new issue of common stock: The required return on the company’s new equity is 15 percent.
b. 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.
c. 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.) What is the NPV of the new plant? Assume that the company has a 21 percent tax rate.

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