Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-to-equity ratio of 0.56. It is considering building a new $62 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $7.9 million a year in perpetuity. The company raises all equity from outside financing. The required financing will be met by the following: 1. A new issue of common stock. The flotation costs of the new common stock would be 9 percent of the amount raised. The required return on the company's new equity is 13 percent. 2. A new issue of 25-year bonds. The flotation costs of the new bonds would be 5 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 9 percent, they will sell at par. 3. 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 0.30. (Assume there is no difference between the pre-tax and after-tax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 35 percent tax rate. (Round your intermediate calculations to 4 decimal places. Round the final answer to the nearest whole dollar amount. Enter the answer in dollars. Omit $ sign in your response.) NPV
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-to-equity ratio of 0.56. It is considering building a new $62 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $7.9 million a year in perpetuity. The company raises all equity from outside financing. The required financing will be met by the following: 1. A new issue of common stock. The flotation costs of the new common stock would be 9 percent of the amount raised. The required return on the company's new equity is 13 percent. 2. A new issue of 25-year bonds. The flotation costs of the new bonds would be 5 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 9 percent, they will sell at par. 3. 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 0.30. (Assume there is no difference between the pre-tax and after-tax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 35 percent tax rate. (Round your intermediate calculations to 4 decimal places. Round the final answer to the nearest whole dollar amount. Enter the answer in dollars. Omit $ sign in your response.) NPV
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 20P
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Transcribed Image Text:Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-to-equity ratio
of 0.56. It is considering building a new $62 million manufacturing facility. This new plant is expected to generate after-tax cash flows
of $7.9 million a year in perpetuity. The company raises all equity from outside financing. The required financing will be met by the
following:
1. A new issue of common stock. The flotation costs of the new common stock would be 9 percent of the amount raised. The required
return on the company's new equity is 13 percent.
2. A new issue of 25-year bonds. The flotation costs of the new bonds would be 5 percent of the proceeds. If the company issues
these new bonds at an annual coupon rate of 9 percent, they will sell at par.
3. 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 0.30. (Assume there is no difference between the pre-tax and after-tax accounts payable cost.)
What is the NPV of the new plant? Assume that PC has a 35 percent tax rate. (Round your intermediate calculations to 4 decimal
places. Round the final answer to the nearest whole dollar amount. Enter the answer in dollars. Omit $ sign in your response.)
NPV $
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