Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

2 Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 75. It's considering building a new $71

image text in transcribed

2 Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 75. It's considering building a new $71 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.9 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 6.67 points Skipped 1. A new issue of common stock: The flotation costs of the new common stock would be 6.8 percent of the amount raised. The required return on the company's new equity is 14 percent. eBook Print 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.5 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5 percent, they will sell at par. References 3. 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 .15. (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 24 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.) Mc Graw Prev 2 of 15 11 Next > 2 Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 75. It's considering building a new $71 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.9 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 6.67 points Skipped 1. A new issue of common stock: The flotation costs of the new common stock would be 6.8 percent of the amount raised. The required return on the company's new equity is 14 percent. eBook Print 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.5 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5 percent, they will sell at par. References 3. 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 .15. (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 24 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.) Mc Graw Prev 2 of 15 11 Next >

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

Personal Finance

Authors: Vickie L Bajtelsmit

2nd Edition

111959247X, 9781119592471

More Books

Students also viewed these Finance questions

Question

=+d) What components would you now say are in this series?

Answered: 1 week ago