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Question 2 Landman Corporation ( LC ) manufactures time series photographic equipment. It is currently at its target debt - equity ratio of 0 .
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Landman Corporation LC manufactures time series photographic equipment. It is currently at
its target debtequity ratio of It's considering building a new $ million manufacturing
facility. This new plant is expected to generate aftertax cash flows of $ 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
percent of the amount raised. 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 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 Assume there is no difference between the pretax and aftertax accounts
payable cost.
What is the NPV of the new plant? Assume the tax rate is percent.
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