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Problem 1 3 - 2 2 Flotation Costs and NPV Landman Corporation ( LC ) manufactures time serles photographic equipment. It is currently at its
Problem Flotation Costs and NPV
Landman Corporation LC manufactures time serles photographic equipment. It is
currently at its target debtequity ratio of It's considering bullding a new $ million
manufacturing facility. This new plant is expected to generate aftertax cash flows of $
million in perpetulty. The company ralses all equity from outside financing. There are
three financing optlons:
A new Issue of common stock. The flotation costs of the new common stock would be
percent of the amount ralsed. The required return on the company's new equity is
percent.
A new Issue of year bonds. The flotation costs of the new bonds would be
percent of the proceeds. If the company Issues these new bonds at an annual coupon
rate of percent, they will sell at par.
Increased use of accounts payable financing. Because this financing is part of the
company's ongoing dally 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 longterm debt of 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 percent tax rate. Do not
round Intermedlate calculations and enter your answer In dollars, not millions of
dollars, rounded to the nearest whole number, eg
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