Problem 13-22 Flotation Costs and NPV 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 $57 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.9 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 8.7 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 3.7 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.8 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 22 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

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
Problem 1PS
icon
Related questions
Question

6

Problem 13-22 Flotation Costs and NPV
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 $57 million
manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.9
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
8.7 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 3.7
percent of the proceeds. If the company issues these new bonds at an annual coupon
rate of 5.8 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 22 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
.…..........
Transcribed Image Text:Problem 13-22 Flotation Costs and NPV 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 $57 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.9 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 8.7 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 3.7 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.8 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 22 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 .…..........
Expert Solution
steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education