Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.85. It's considering building a new $51 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $6.8 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 11% of the amount raised. The required return on the company's new equity is 16%. 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 0.155. (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 43% tax rate. (Enter the answer in dollars. Do not round intermediate calculations. Round the WACC percentage to 2 decimal places. Round the final 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 0.85. It's considering building a new $51 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $6.8 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 11% of the amount raised. The required return on the company's new equity is 16%. 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 0.155. (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 43% tax rate. (Enter the answer in dollars. Do not round intermediate calculations. Round the WACC percentage to 2 decimal places. Round the final 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
Problem 1PS
Related questions
Question
13.
Transcribed Image Text:Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of O.85. It's
considering building a new $51 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $6.8
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 11% of the amount raised. The required
return on the company's new equity is 16%.
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 0.155. (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 43% tax rate. (Enter the answer in dollars. Do not round intermediate
calculations. Round the WACC percentage to 2 decimal places. Round the final answer to 2 decimal places. Omit $ sign in your
response.)
NPV
%24
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
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…
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