Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .8. Its considering building a new $77 million

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .8. Its considering building a new $77 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.7 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 6.2 percent of the amount raised. The required return on the companys new equity is 11 percent.

2.

A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.7 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 4 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 .10. (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 25 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets And Institutions

Authors: Frederic S. Mishkin

2nd Edition

0321014650, 9780321014658

More Books

Students also viewed these Finance questions

Question

Explain the place of planning in human resource management

Answered: 1 week ago