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 .8. It’s considering building a new $72 millionmanufacturing facility. This new plant is expected to generateaftertax cash flows of $8.4 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 6.7 percent of the amount raised. Therequired return on the company’s new equity is 15 percent.
2.
A new issue of 20-year bonds: The flotation costs ofthe new bonds would be 2.6 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 company’s 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 .20. (Assume there is nodifference between the pretax and aftertax accounts payablecost.)
What is the NPV of the new plant? Assume that PC has a 25percent tax rate. (Do not round intermediate calculationsand enter your answer in dollars, not millions, rounded to thenearest whole dollar amount, e.g., 1,234,567.)

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4.3 Ratings (562 Votes)

Financing Option1 Common stock Floatation cost 670 Required return 15 Fund required 72000000 Which is net of floation cost hence to amount required to raise Total fund required Fund after floation cost X 100 100 of floation cost 7200000010010067 7717041801 Revised required return Original Investment X Required rate of return Investment after floatation See Answer

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Photochronograph Corporation (PC) manufactures time seriesphotographic equipment. It is currently at its target debt-equityratio of .8. It’s considering building a new $72 millionmanufacturing facility. This new plant is expected to generateaftertax cash flows of $8.4 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 6.7 percent of the amount raised. Therequired return on the company’s new equity is 15 percent.2.A new issue of 20-year bonds: The flotation costs ofthe new bonds would be 2.6 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 company’s 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 .20. (Assume there is nodifference between the pretax and aftertax accounts payablecost.)What is the NPV of the new plant? Assume that PC has a 25percent tax rate. (Do not round intermediate calculationsand enter your answer in dollars, not millions, rounded to thenearest whole dollar amount, e.g., 1,234,567.)

1.	A new issue of common stock: The flotation costs of thenew common stock would be 6.7 percent of the amount raised. Therequired return on the company’s new equity is 15 percent.

2.	A new issue of 20-year bonds: The flotation costs ofthe new bonds would be 2.6 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 company’s 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 .20. (Assume there is nodifference between the pretax and aftertax accounts payablecost.)