Manufactures time series photographic equipment

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Reference no: EM13724180

Photo light Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt/equity ratio of 0.60. It's considering building a new manufacturing facility. The facility costs $40 million now to build. This new plant is expected to generate after-tax cash flow of $6.2 million a year for 5 years. The company raises all equity from issuing new stocks. There are financing options:

1. A new issue of common stocks: the flotation costs could be 8%. The required rate of return on the company's new equity is 14%.

2. A new issue of 20-year bonds: the flotation costs of the new bonds would be 4% of the proceeds. The Yield To Maturity to the new bond is 8%.

Should PC build the new plant? Assume that PC has a 40% tax rate.

Reference no: EM13724180

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