Question

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .71. It’s considering building a new $66.1 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.52 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 15.3 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 .13. (Assume there is no difference between the pretax and aftertax accounts payable cost.)
If the tax rate is 21 percent, what is the NPV of the new plant?

Answer 1

А В C D E F G Weights Weighted cost Flotation cost (r) Pre-tax cost of debt 7.6% 1 2 Long-term debt 0.00% 0.00% 0.8850 After-tax cost of debt 0.00% 0.1150 Accounts payable 0.00% 6.00% 4 Total debt Required return on new equity 15.3% 1.0000 6 Flotation cost of debt 7 0.00% 8 Weights Weighted cost Flotation cost (r) 10 Debt 11 Equity 0.00% 0.4152 0.00% 0.00% 0.00% 0.5848 12 Total debt 13 1.0000 14 Weighted flotation cost 15 0.00% 16 17 Initial cost $ 66,100,000 18 19 WACC 11.71% 20 -$1,897,593.15 21 NPV

A В C E F G 0.076 Flotation cost (r) Weights - 1 / 1.13 Pre-tax cost of debt 1 Weighted cost C2* B2 |ЕС3*ВЗ 2 Long-term debt 3 Accounts payable 0 0 =G1*(1-21 %) =0.13/1.13 After-tax cost of debt -SUM(C2:C4) Required return on new equity 0.153 5 Total debt 6 SUM(D2: D3) Flotation cost of debt 7 Flotation cost (r 9 Weights Weighted cost 10 Debt 11 Equity -0.71/1.71 -C10*B10 =D7 -1/1.71 -C11* B11 0 12 -SUM (C10:C12) 13 Total debt 14 Weighted flotation cost SUM (D10:D11) 15 16 17 Initial cost 66100000/(1-D15) 18 | =(C11 G5+C10*C2*G3)/(1-C10*C3) 19 WACC 20 |= 7520000/B19-B17 21 NPV

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