iPad 11:25 PM ezto.mheducation.com 22% value: 1.00 points Photochronograph Corpo

Question

iPad 11:25 PM ezto.mheducation.com 22% value: 1.00 points Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .68. It's considering building a new $65.8 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.83 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 percent. b. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.3 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.) Required: If the tax rate is 38 percent, what is the NPV of the new plant? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).) Net present value References eBook & Resources Worksheet Difficulty: Challenge Learning Objective: 12-03 Determine a firms overall cost of capital Check my_ work

Explanation / Answer

A.

Cash flow after tax = 7830000 $

required rate of return = 15%

total cash flow = 7830000 / .15 = 52200000

building cost = 65800000

NPV = (13600000) $ loss

( NOTE BECAUSE OF ABSENCE OF INFORMATION REGARDING WACC . REQUIRED RATE OF RETURN FOR EQUITY IS TAKEN )

B.

PAT = 7830000 $

ADD TAX = 4799032.25

PBT = 12629032.25

LESS INTEREST ON BOND = 4803400

PBT = 7825632.25

TAX = 2973740.25

PAT = 4851892

total cash flow = 4851892 / .073* * WACC IS TO BE TAKEN

= 66464273.97

building cost = 65800000

NPV = 664273.97 $

C.

PAT = 7830000 $

ADD TAX = 4799032.25

PBT = 12629032.25

INT. ON ACCOUNT PAYABLE = 8554000 (65800000 * 13%)

PAT = 4075032.25

total cash flow = 4075032.25 / .13* * WACC IS TO BE TAKEN

= 31346401.92

building cost = 65800000

NPV = (34453598.08)

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