Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .66. It’s considering building a new $65.6 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.45 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 15.2 percent.b.A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.1 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 .12. (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?

Debt-equity ratio = 0.66 (Given) Debt to value ratio= 0.66/(1+0.66)= 0.40 Equity to value ratio= 1/(1+0.66)= 0.60 Accounts payable to long term debt ratio= 0.12(given) Long term bond to value ratio= 1/1.12 *0.40 = 0.35 Short term debt to value ratio= 0.12/1.12 *0.40= 0.04 The weighted average cost of capital: Let W be the weighted average cost of capital W= Cost of equity*Equity to value ratio+ Cost of long term debt*Long term bond to value ratio*(1-tax rate) + Cost of short term debt*W*Short term debt to value ratio W= 11.64% NPV of the new plant: =(7450000/11.64%) - 65600000 =-1596563.57 (It is an approximate value as only decimal place up to 2 is taken in the entire calculation )

Answered: If the tax rate is 21 percent, what is…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .66. It’s considering building a new $65.6 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.45 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 15.2 percent.
b.	A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.1 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 .12. (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?

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