Photochronograph Corporation (PC) manufactures time seriesphotographic equipment. It is currently at its target debtâequityratio of .75. Itâs considering building a new $54 millionmanufacturing facility. This new plant is expected to generateaftertax cash flows of $6.6 million in perpetuity. The companyraises all equity from outside financing. There are three financingoptions:
1. A new issue of common stock: The flotation costs of thenew common stock would be 8.4 percent of the amount raised. Therequired return on the companyâs new equity is 15 percent.
2. A new issue of 20-year bonds: The flotation costs ofthe new bonds would be 3 percent of the proceeds. If the companyissues these new bonds at an annual coupon rate of 6 percent, theywill sell at par.
3. Increased use of accounts payable financing: Becausethis financing is part of the companyâs ongoing daily business, ithas no flotation costs, and the company assigns it a cost that isthe same as the overall firm WACC. Management has a target ratio ofaccounts payable to long-term debt of .10. (Assume there is nodifference between the pretax and aftertax accounts payablecost.)
What is the NPV of the new plant? Assume that PC has a 38percent tax rate. (Enter your answer in dollars, notmillions of dollars, i.e. 1,234,567. Do not round intermediatecalculations and round your final answer to the nearest wholedollar amount.)
Photochronograph Corporation (PC) manufactures time seriesphotographic equipment. It is currently at its target debtâequityratio of .75. Itâs considering building a new $54 millionmanufacturing facility. This new plant is expected to generateaftertax cash flows of $6.6 million in perpetuity. The companyraises all equity from outside financing. There are three financingoptions: |
| 1. | A new issue of common stock: The flotation costs of thenew common stock would be 8.4 percent of the amount raised. Therequired return on the companyâs new equity is 15 percent. |
| 2. | A new issue of 20-year bonds: The flotation costs ofthe new bonds would be 3 percent of the proceeds. If the companyissues these new bonds at an annual coupon rate of 6 percent, theywill sell at par. |
| 3. | Increased use of accounts payable financing: Becausethis financing is part of the companyâs ongoing daily business, ithas no flotation costs, and the company assigns it a cost that isthe same as the overall firm WACC. Management has a target ratio ofaccounts payable to long-term debt of .10. (Assume there is nodifference between the pretax and aftertax accounts payablecost.) |
What is the NPV of the new plant? Assume that PC has a 38percent tax rate. (Enter your answer in dollars, notmillions of dollars, i.e. 1,234,567. Do not round intermediatecalculations and round your final answer to the nearest wholedollar amount.) |
