In: Finance
Photochronograph
Corporation (PC) manufactures time series photographic equipment.
It is currently at its target debt–equity ratio...
Photochronograph
Corporation (PC) manufactures time series photographic equipment.
It is currently at its target debt–equity ratio of .68. It’s
considering building a new $65.8 million manufacturing facility.
This new plant is expected to generate aftertax cash flows of $7.83
million in perpetuity. There are three financing options:
- A new issue of common stock: The required return on
the company’s new equity is 15 percent.
- A new issue of 20-year bonds: If the company issues
these new bonds at an annual coupon rate of 7.3 percent, they will
sell at par.
- Increased use of accounts payable financing: Because
this financing is part of the company’s ongoing daily business, 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 .13. (Assume there is no difference between the
pretax and aftertax accounts payable cost.)
If the tax rate is 38 percent, what is the NPV of the new plant?
(A negative answer should be indicated by a minus sign. Do
not round intermediate calculations and enter your answer in
dollars, not millions of dollars, e.g., 1,234,567. Round your
answer to 2 decimal places, e.g., 32.16.)
Net present value
$