In: Finance
Retlaw Corporation
(RC) manufactures time-series photographic equipment. It is
currently at its target debt–equity ratio of...
Retlaw Corporation
(RC) manufactures time-series photographic equipment. It is
currently at its target debt–equity ratio of 0.77. It’s considering
building a new $57 million manufacturing facility. This new plant
is expected to generate after-tax cash flows of $8.6 million 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 9% of the amount raised. The required
return on the company’s new equity is 15%.
- 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 8.0%, 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 0.210. (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 25% tax rate. (Enter the
answer in dollars. Do not round intermediate calculations. Round
the WACC percentage to 2 decimal places. Round the final answer to
2 decimal places. Omit $ sign in your response.)
NPV ?
$