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Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of .85. It’s considering building a new $40 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.2 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 percent of the amount raised. The required return on the company’s new equity is 13 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 7 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 .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 40 percent tax rate.
A firm is considering two different capital structures. The first option is an all-equity firm with 32,000 shares of stock. The second option is 20,000 shares of stock plus some debt. Ignoring taxes, the break-even level of earnings before interest a..
Bennington Industrial Machines issued 149,000 zero coupon bonds six years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.4 percent. Interest rates have recently increased, and the bonds now have a yield to maturity o..
Explain how using the dividend discount model (DDM) to value a preferred stock with a stated maturity differs from valuing a preferred stock with no maturity, and discuss how the price of a share of preferred stock is calculated in both cases.
A 6.45 percent coupon bond with fifteen years left to maturity is priced to offer a 7.9 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. What is the change in price the bond will experience in dollar..
If a firm’s common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:
If you buy a call and sell a put option on the same underlying, at the same strike price, with the same option maturity, your possible payoff will look exactly like what other trading strategy? Explain. (Both options are European.)
This Discussion focuses on mass communications, advertising, sales promotions, and public relations. Select one article that applies to mass communications, advertising, sales promotions, or public relations. Keep in mind, when responding to each uni..
Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $7.3 milli..
Billy’s Exterminators, Inc., has sales of $752,000, costs of $312,000, depreciation expense of $64,000, interest expense of $42,000, a tax rate of 35 percent, and paid out $57,600 in cash dividends. The firm has 120,000 shares of common stock outstan..
What are educational harms? What are social harms? What are physical harms? What are psychological harms?
As an advisor, you must advise an individual named John about his investments. Assume his risk profile and his return objectives and explain (in detail) the recommended appropiate investments for him
S. Miller is looking to expand an existing project. The expansion requires an immediate investment of $73 million. S. Miller anticipates that the project will generate one future cash flow of $200 million that will arrive at the end of year 6, and on..
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