Photochronograph Corporation (PC) manufactures time series photographic equipmen
ID: 2633790 • Letter: P
Question
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 0.66. It's considering building a new $65.6 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.81 million in perpetuity. The company raises all equity from outside financing. There are three financing options:
A new issue of common stock: The required return on the company
a.A new issue of common stock: The required return on the company
Explanation / Answer
Target Debt Equity ratio 0.66 Proportion of debt 0.39759 Proportion Of Equity 0.60241 Accounts payable to long tem debt 0.152 Accounts payable to total debt 0.131944 Long term debt to total debt 0.868056 Source Weights Cost Equity 0.60 15% 0.09 Long term debt 0.05 4.69% 0.0025 Accounts Payable 0.35 10.90% 0.04 WACC 13.04% After tax cash flows 7.81 million Present value of cash flows 59.88 Less: cash Outflows 65.60 NPV (5.72)