currently at its target debt-equity ratio of .75. It's considering building a new $41 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.3 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 7.1 percent of the amount raised. The required return on the company's new equity is 15 percent. 2. A new issue of 20-year bonds. The flotation costs of the new bonds would be 2.7 percent of the proceeds. If the company issues these new bonds at an annual coupon
currently at its target debt-equity ratio of .75. It's considering building a new $41 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.3 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 7.1 percent of the amount raised. The required return on the company's new equity is 15 percent. 2. A new issue of 20-year bonds. The flotation costs of the new bonds would be 2.7 percent of the proceeds. If the company issues these new bonds at an annual coupon
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Landman Corporation (LC) manufactures time series photographic equipment. It is
currently at its target debt-equity ratio of .75. It's considering building a new $41 million
manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.3
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
7.1 percent of the amount raised. The required return on the company's new equity is
15 percent.
2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.7
percent of the proceeds. If the company issues these new bonds at an annual coupon
rate of 5.7 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 10. Assume there is no difference between the
pretax and aftertax accounts payable costs.
What is the NPV of the new plant? Assume that LC has a 24 percent tax rate. (Do not
round intermediate calculations and enter your answer in dollars, not millions of
dollars, rounded to the nearest whole number, e.g., 1,234,567.)
NPV
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