Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .77. It’s considering building a new $66.7 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.92 million in perpetuity. There are three financing options: |
a. |
A new issue of common stock: The required return on the company’s new equity is 15.1 percent. |
b. | A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.6 percent, they will sell at par. |
c. | 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 .09. (Assume there is no difference between the pretax and aftertax accounts payable cost.) |
If the tax rate is 22 percent, what is the NPV of the new plant? |
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