Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.88 It's considering building a new $39 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.5 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 10% of the amount raised. The required return on the company's new equity is 14% 2.A new issue of 20-year bonds. The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, 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 0.160 (Assume there is no difference between the pre-tax and after-tax accounts payable cost) What is the NPV of the new plant? Assume that RC has a 40% tax rate. (Enter the answer in dollers. Do not round intermediate celculations. Round the WACC percentage to 2 decimal places. Round the finel answer to 2 decimal places. Omit $ sign in your response) NPV
Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.88 It's considering building a new $39 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.5 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 10% of the amount raised. The required return on the company's new equity is 14% 2.A new issue of 20-year bonds. The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, 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 0.160 (Assume there is no difference between the pre-tax and after-tax accounts payable cost) What is the NPV of the new plant? Assume that RC has a 40% tax rate. (Enter the answer in dollers. Do not round intermediate celculations. Round the WACC percentage to 2 decimal places. Round the finel answer to 2 decimal places. Omit $ sign in your response) 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
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Transcribed Image Text:Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.88 It's
considering building a new $39 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.5
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 10% of the amount raised. The required return
on the company's new equity is 14%
2. A new issue of 20-year bonds. The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new
bonds at an annual coupon rate of 8.0%, 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 0:160 (Assume there is no difference between the pre-tax and after-tax accounts payable
cost)
What is the NPV of the new plant? Assume that RC has a 40% tax rate. (Enter the answer in dollers. Do not round intermediate
calculations. Round the WACC percentage to 2 decimal places. Round the finel answer to 2 decimal places. Omit 3 sign in your
response.)
NPV
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