Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .75 and is considering building a new $44 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.6 million a year in perpetuity. The company raises all equity from outside financing. There are three financing options: A new issue of common stock: The flotation costs of the new common stock would be 7.4 percent of the amount raised. The required return on the company's new equity is 15 percent. A new issue of 20-year bonds: The flotation costs of the new bonds would be 3 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 6 percent, they will sell at par. 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 .10. ( Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that the company has a 21 percent tax rate. Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e. g., 1,234,567.
Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .75 and is considering building a new $44 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.6 million a year in perpetuity. The company raises all equity from outside financing. There are three financing options: A new issue of common stock: The flotation costs of the new common stock would be 7.4 percent of the amount raised. The required return on the company's new equity is 15 percent. A new issue of 20-year bonds: The flotation costs of the new bonds would be 3 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 6 percent, they will sell at par. 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 .10. ( Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that the company has a 21 percent tax rate. Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e. g., 1,234,567.
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 20P
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Transcribed Image Text:Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt - equity
ratio of .75 and is considering building a new $44 million manufacturing facility. This new plant is expected to generate
aftertax cash flows of $5.6 million a year in perpetuity. The company raises all equity from outside financing. There are
three financing options: A new issue of common stock: The flotation costs of the new common stock would be 7.4
percent of the amount raised. The required return on the company's new equity is 15 percent. A new issue of 20-year
bonds: The flotation costs of the new bonds would be 3 percent of the proceeds. If the company issues these new bonds
at an annual coupon rate of 6 percent, they will sell at par. 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 .10. (
Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new
plant? Assume that the company has a 21 percent tax rate. Note: Do not round intermediate calculations and enter your
answer in dollars, not millions of dollars, rounded to the nearest whole number, e. g., 1,234,567.
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