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Posted by: Homeworkhelp
Price Quoted by Student: $5
Posted On: 2012-02-07 12:12:19
 
Question

Photo Chronograph Corporation manufactures time series photographic equipment.  It is currently at this target debt-equity ration of 1:3.

 

WACC and NPV - Photo Chronograph Corporation manufactures time series photographic equipment.  It is currently at this target debt-equity ration of 1:3.  It's considering building a new $45 million manufacturing facility.  This new plant is expected to generate after-tax cash flows of $5.7 million in perpetuity.  There are three financing options:

1.  A new issue of common stock.  The required return on the company's equity is 17%.

2. A new issue of 20-year bonds.  If the company issues these new bonds at an annul coupon rate of 9%, they will sell at par.

3. 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 .20 (assume there is no difference between the pretax and after-tax accounts payable cost)

 

What is the NPV of the new plant?  Assume the PC has a 35% tax rate.


Solutions
What is the NPV of the new plant?  Assume the
Price $5
Attachment 1: Photo Chronograph.doc
Solution Posted By: Homeworkhelp    Posted on: 07-02-2012