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Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of 0.80. It’s considering building a new $42 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.4 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 7.2 percent of the amount raised. The required return on the company’s new equity is 14 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 5.0 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0 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 0.15. (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 35 percent tax rate.
Swaps provide for more complete financial markets and help borrowers tailor their financing at lower interest rates in markets that might not be accessible to them. However swaps present risks. If you were the swap bank, discuss the 2 risks that you ..
Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________.
A ________ exchange rate is the quoted price for a unit of foreign currency to be delivered within a very short period of time. The Government does not set a _______ exchange rate, which means that supply and demand in the market determine the curren..
Your firm purchases goods from its supplier on terms of 2.2/ 15, net 30. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 30? What is the effective annual cost to your firm if it choos..
Do you know Danica from the Philippines, Peter from London, Nargis from India, Marina from Russia, Chieko from Japan, or Miran from the United States? These are some of the babies whose parents claimed they were the 7th billion human born into the wo..
You are 30 years old and planning to retire at age 62. You want to plan your finances for living 35 years past age 62 and then die dead broke. You determine that you will need $3000 per month for the 35 years. At age 62, you plan to go live in the tr..
Your firm has an average collection period of 26 days. Current practice is to factor all receivables immediately at a discount of 1.6 percent. What is the effective cost of borrowing in this case? (Do not round intermediate calculations. Enter your a..
Observe the sales-to-net property, plant, and equipment ratios for the same year for American Airlines (1.258), Oracle Corporation (10.338), Alcan, Inc. an aluminum manufacturer (1.907), and Yahoo, Inc. (5.834). Respond to the following: What does th..
Compare and contrast the bottom-up budgeting process with the top-down budgeting process. Make sure to discuss their advantages and disadvantages in regard to estimating project budgets and when it is appropriate to use each process.
A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $80,000 would be required to manufacture their new product, which is estimated to produce sales of $70,000 in new revenues each year. what i..
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi annually.
A 10-year annuity pays $1,250 per month, and payments are made at the end of each month. If the interest rate is 12 percent compounded monthly for the first five years, and 8 percent compounded monthly thereafter, what is the present value of the ann..
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