Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of...

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Photochronograph Corporation (PC) manufactures time seriesphotographic equipment. It is currently at its target debt-equityratio of .85. It’s considering building a new $62 millionmanufacturing facility. This new plant is expected to generateaftertax cash flows of $7.4 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 6.9 percent of the amount raised. Therequired return on the company’s new equity is 14 percent. 2. A newissue of 20-year bonds: The flotation costs of the new bonds wouldbe 2.5 percent of the proceeds. If the company issues these newbonds at an annual coupon rate of 7 percent, they will sell at par.3. Increased use of accounts payable financing: Because thisfinancing is part of the company’s ongoing daily business, it hasno flotation costs, and the company assigns it a cost that is thesame as the overall firm WACC. Management has a target ratio ofaccounts payable to long-term debt of .15. (Assume there is nodifference between the pretax and aftertax accounts payable cost.)What is the NPV of the new plant? Assume that PC has a 25 percenttax rate.

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4.3 Ratings (764 Votes)

Since this Ratio of Debt to Equity is 85 and the required Finance is 62 million So Equity portion comes to 335 million 62185 Remaining portion goes to Debt which is 2850 million Since accounts payable See Answer

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Photochronograph Corporation (PC) manufactures time seriesphotographic equipment. It is currently at its target debt-equityratio of .85. It’s considering building a new $62 millionmanufacturing facility. This new plant is expected to generateaftertax cash flows of $7.4 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 6.9 percent of the amount raised. Therequired return on the company’s new equity is 14 percent. 2. A newissue of 20-year bonds: The flotation costs of the new bonds wouldbe 2.5 percent of the proceeds. If the company issues these newbonds at an annual coupon rate of 7 percent, they will sell at par.3. Increased use of accounts payable financing: Because thisfinancing is part of the company’s ongoing daily business, it hasno flotation costs, and the company assigns it a cost that is thesame as the overall firm WACC. Management has a target ratio ofaccounts payable to long-term debt of .15. (Assume there is nodifference between the pretax and aftertax accounts payable cost.)What is the NPV of the new plant? Assume that PC has a 25 percenttax rate.