Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at ts target debt-equity ratio of 074 its
considering building a new 548 million manufacturing facility. This new plant is expected to generate sher-tax cash flows of $4
milion in perpetuity. The company raises all equity from outside financing. There are three financing options
1 A new issue of common stock: The flotation costs of the new common stock would be 7% of the amount raised. The required retur
on the company's new equity is 14%
2 A new issue of 20-year bonds The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new
bonds at an annual coupon rate of 80%, 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
fotation costs, and the company assigns it a cost that is the same as the overall frm WACC Management has a target ratio of
accounts payable to long-term debt of 0135 (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 RC has a 46% tax rate (Enter the answer in deitars. De not round Intermediate
calculations, Round the WACC percentage to 2 decimal pieces. Bound the final answer to 2 decimat pisces. Ons s sign in your
response)
NOV
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