Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity rati
Posted: Mon Nov 15, 2021 5:17 pm
Landman Corporation (LC) manufactures time series photographic
equipment. It is currently at its target debt-equity ratio of .65.
It’s considering building a new $64 million manufacturing facility.
This new plant is expected to generate aftertax cash flows of $7.6
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 7.2 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 2.7 percent of the proceeds. If the company issues
these new bonds at an annual coupon rate of 5 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
cost.)
What is the NPV of the new plant? Assume the company has a 22
percent tax rate. (Do not round intermediate calculations and enter
your answer in dollars, not millions, rounded to the nearest whole
number, e.g., 1,234,567.)
equipment. It is currently at its target debt-equity ratio of .65.
It’s considering building a new $64 million manufacturing facility.
This new plant is expected to generate aftertax cash flows of $7.6
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 7.2 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 2.7 percent of the proceeds. If the company issues
these new bonds at an annual coupon rate of 5 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
cost.)
What is the NPV of the new plant? Assume the company has a 22
percent tax rate. (Do not round intermediate calculations and enter
your answer in dollars, not millions, rounded to the nearest whole
number, e.g., 1,234,567.)