photographic equipment. Photo Chronograph Corporation manufactures time series
It is currently at this target debt-equity ration of 1:3.
WACC and NPV
Photo Chronograph Corporation manufactures time series photographic equipment. It is currently at
this target debt-equity ration of 1:3. It's considering building a new $45 million manufacturing
facility. This new plant is expected to generate after-tax cash flows of $5.7 million in perpetuity.
There are three financing options:
1. A new issue of common stock. The required return on the company's equity is 17%.
2. A new issue of 20-year bonds. If the company issues these new bonds at an annul coupon rate of
9%, they will sell at par.
3. 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 .20
(assume there is no difference between the pretax and after-tax accounts payable cost)
What is the NPV of the new plant? Assume the PC has a 35% tax rate.
