Company raises all equity from outside financing

Assignment Help Financial Management

Reference no: EM131343171

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of .85. It’s considering building a new $40 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.2 million 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 percent of the amount raised. The required return on the company’s new equity is 13 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 7 percent, 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 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 .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 40 percent tax rate.

Reference no: EM131343171

Questions Cloud

What is regal after-tax cost of new preferred stock : As the Capital Budgeting Manager of Regal Corp., you are engaged in determining the Weighted Average Cost of Capital for the firm for the upcoming year. What is Regal's optimum, target capital structure? What is Regal's cost of retained earnings usin..

Investors diversify their portfolio holdings to : The initial impetus for globalized financial markets came from the governments of major countries deregulating their domestic financial markets, allowing more foreign participation in them. Investors diversify their portfolio holdings to:

Return on stock based on expected future cash flows : What is the expected return on stock E based on the expected future cash flows? What is the required return based on the CAPM? Is stock E undervalued, correctly priced, or overvalued?

Agreement to exchange cash flows at periodic intervals : In interest rate swaps, two counterparties make a contractual agreement to exchange cash flows at periodic intervals. With a swap transaction, both principal and the last year's interest payment are repaid by the borrower at maturity. A quality sprea..

Company raises all equity from outside financing : Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of .85. It’s considering building a new $40 million manufacturing facility. This new plant is expected to generate afte..

Most of earnings to finance that intense growth level : Massy United Ltd. has been experiencing high levels of growth over the past 5 years and management has decided to retain most of its earnings to finance that intense growth level. If the required rate of return is 14.5 percent what is the market valu..

Firm decides to spend this amount of excess cash : Share repurchase proposal: Currently, the firm has available capital (cash and net income) of approximately $5,000,000. There is a large block of stock available at $25 a share. The initial outstanding shares for the company are 15,000,000. If the fi..

Business due to increase in interest rates : Infinity Designs, an interior design company, has experienced a drop in business due to an increase in interest rates and a corresponding slowdown in remodeling projects. To stimulate business, the company is considering exhibiting at the Home and Ga..

Calculate the rate of return on equity for each firm : Financial leverage effects Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $17 million in invested capital, has $2.55 million of EBIT, and is in the 40% federal-plus-state tax bracket. ..

User Account

All Pages