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 .7. It’s considering building a new $70 millionmanufacturing facility. This new plant is expected to generateaftertax cash flows of $7.3 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 the newcommon stock would be 6.9 percent of the amount raised. Therequired return on the company’s new equity is 13 percent.
2. A new issue of 20-year bonds: The flotation costs of the newbonds would be 2.4 percent of the proceeds. If the company issuesthese new bonds at an annual coupon rate of 4 percent, they willsell 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 .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 23percent tax rate. (Do not round intermediate calculations and enteryour answer in dollars, not millions, rounded to the nearest wholedollar amount, e.g., 1,234,567.)

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3.8 Ratings (589 Votes)

Calculating Weights of three sources of capital DebtEquity 070 070 1 We know that Debt Equity total capital So DebtTotal capital DebtEquity Debt 070 170 4118 Also DebtTotal Capital EquityTotal capital 1 EquityTotal capital 1 DebtTotal capital 1 4118 5882 Hence Weight of equity 5882 Now we will find the weight of long term debt and accounts payable financing We know that Accounts payable financing Long term debt Debt It is given that Accounts payable Financing Long term debt 010 010 1 Now we get See Answer

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Photochronograph Corporation (PC) manufactures time seriesphotographic equipment. It is currently at its target debt-equityratio of .7. It’s considering building a new $70 millionmanufacturing facility. This new plant is expected to generateaftertax cash flows of $7.3 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 the newcommon stock would be 6.9 percent of the amount raised. Therequired return on the company’s new equity is 13 percent.2. A new issue of 20-year bonds: The flotation costs of the newbonds would be 2.4 percent of the proceeds. If the company issuesthese new bonds at an annual coupon rate of 4 percent, they willsell 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 .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 23percent tax rate. (Do not round intermediate calculations and enteryour answer in dollars, not millions, rounded to the nearest wholedollar amount, e.g., 1,234,567.)