Photochronograph Corporation (PC) manufactures time series photographic equipmen
ID: 2765585 • Letter: P
Question
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? (Do not round intermediate calculations. 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).)
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:
Explanation / Answer
NPV of new plant with WACC WACC formula WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)] E = Market value of the company's equity D = Market value of the company's debt V = Total Market Value of the company (E + D) Re = Cost of Equity Rd = Cost of Debt T= Tax Rate Debt : Equity 68 100 total value 168 total value of new project 65,800,000.00 Debt 26,633,333.33 65.8/168*68 equity 39,166,666.67 65.8-26.6333 WACC from above formula 10.76% Acounts payable to debt: 13:100 AP 3,462,333.33 Debt 26,633,333.33 NPV of the Plant calculation Perpetuity formula CF/WACC NPV of the Plant 72,765,974.39