Problem $13-22$ Flotation Costs and NPV

Landman Corporation $($LC$)$ manufactures time series photographic equipment. It is

currently at its target debt$-$equity ratio of $85.$ It's considering building a new $$47$ million

manufacturing facility. This new plant is expected to generate aftertax cash flows of $$5\mathrm{.}5$

million in perpetuity. The company raises all equity from outside financing. There are

three financing options:

A new issue of common stock. The flotation costs of the new common stock would be

$7\mathrm{.}3$ percent of the amount raised. The required return on the company's new equity is

$13$ percent.

A new issue of $20-$year bonds. The flotation costs of the new bonds would be $2\mathrm{.}9$

percent of the proceeds. If the company issues these new bonds at an annual coupon

rate of $5\mathrm{.}8$ percent, they will sell at par.

Increased use of accounts payable financing. Because this financing is part of the

company's 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 $\mathrm{.}20.$ Assume there is no difference between

the pretax and aftertax accounts payable costs.

What is the NPV of the new plant? Assume that LC has a $22$ percent tax rate. $($Do not

round intermediate calculations and enter your answer in dollars, not millions of

dollars, rounded to the nearest whole number, e$.$g$.,1,234,567.)$

NPV