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Flotation Costs and NPV 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 $58 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7 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 8.8 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. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) NPV $
The HWS company was recently formed to manufacture a new product. With the following capital structure: 9% debentures of 2002 ($1000 Par) $6,000,000 7% Preferred stock ($100 Par) $2,000,000 Common Stock (320,000 shs.) $8,000,000 total $16,000,000 The..
Your firm is contemplating the purchase of a new $570,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $58,000 at the end of that time. You will save $270,000 before..
What is Barry's total profit or loss if the value of the yen in one month is 0.0070 euro? What is Barry's total profit or loss if the value of the yen in one month is $0.0090 euro?
Write a 700- to 1,050-word paper in which you explain roles of limited liability corporations, limited liability partnerships, and Class C Corporations. If you were establishing your own business, under what circumstances would you choose one instead..
Amarillo Parts is considering purchasing a small firm in the same line of business. The purchase would be financed by either the sale of common stock or by a bond issue. What is the degree of financial leverage for each plan at $7,000,000 of EBIT? Wh..
Marcus, Inc. a U. S. company takes our a 1-year loan in Germany. The U. S. 1-year interest rate is 5%, and the German 1-year interest rate is 6%. The spot rate of the euro is $1.33 and the 1-year forward rate is $1.29. Calculate the effective financi..
Matthew is 64 years old and despite being retired from his occupation as an attorney, earned $25,000 in 2015 while working as a golf instructor at a local golf course. Based on the wage history, his annual social security benefit is projected at $31..
You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2,356 and you have made every payment on time. The original term of the mortgage was 30 years, and the m..
A project costs $10,000 to pursue today and generates pre-tax savings of $1,500 per year for the foreseeable future. The marginal tax rate is 35%. The proect also requires an initial NWC investment of $300 which will not be recouped. If the required ..
Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5 percent. Project A costs $75,000 and has cash flows of $18,500, $42,900, and $28,600 for Years 1 to 3, respectively. Project B costs $72,000 and has cash flows of..
Meyer & Co. expects its EBIT to be $66,000 every year forever. The firm can borrow at 5 percent. Meyer currently has no debt, and its cost of equity is 11 percent. If the tax rate is 35 percent, what is the value of the firm? What will the value be i..
A company wants to select the most economical site for a new factory. Find all of the crossover quantities
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