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 .70. Its considering building a new $66 million

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .70. Its considering building a new $66 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.85 million in perpetuity. There are three financing options:

a.

A new issue of common stock: The required return on the companys new equity is 15.2 percent.

b. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.5 percent, they will sell at par.
c. Increased use of accounts payable financing: Because this financing is part of the companys 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 .12. (Assume there is no difference between the pretax and aftertax accounts payable cost.)
If the tax rate is 25 percent, what is the NPV of the new plant? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

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

Pricing And Liquidity Of Complex And Structured Derivatives

Authors: Mathias Schmidt

1st Edition

3319459694, 978-3319459691

More Books

Students also viewed these Finance questions

Question

Write a program to check an input year is leap or not.

Answered: 1 week ago

Question

Write short notes on departmentation.

Answered: 1 week ago

Question

What are the factors affecting organisation structure?

Answered: 1 week ago

Question

What are the features of Management?

Answered: 1 week ago

Question

Briefly explain the advantages of 'Management by Objectives'

Answered: 1 week ago