Question
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .60. Its considering building a new $65 million
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .60. Its considering building a new $65 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $9.4 million in perpetuity. The company raises all equity from outside financing. There are three financing options: |
1. | A new issue of common stock: The flotation costs of the new common stock would be 8 percent of the amount raised. The required return on the companys new equity is 14 percent. |
2. | A new issue of 20-year bonds: The flotation costs of the new bonds would be 4 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 8 percent, they will sell at par. |
3. | Increased use of accounts payable financing: Because this financing is part of the companys ongoing daily business, it has no flotation costs, and 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 PC has a 21 percent tax rate. |
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