Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.77. It's considering building a new $42 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $7.1 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 10% of the amount raised. The required return on the company's new equity is 15%. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, 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 0.130. (Assume there is no difference between the pre-tax and after-tax accounts payable cost.) What is the NPV of the new plant? Assume that RC has a 34% tax rate. (Enter the answer in dollars. Do not round intermediate calculations. Round the WACC percentage to 2 decimal places. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $
Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.77. It's considering building a new $42 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $7.1 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 10% of the amount raised. The required return on the company's new equity is 15%. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, 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 0.130. (Assume there is no difference between the pre-tax and after-tax accounts payable cost.) What is the NPV of the new plant? Assume that RC has a 34% tax rate. (Enter the answer in dollars. Do not round intermediate calculations. Round the WACC percentage to 2 decimal places. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 17P
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Question
Am. 112.
Transcribed Image Text:Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.77. It's
considering building a new $42 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $7.1 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 10% of the amount raised. The required return
on the company's new equity is 15%.
2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new
bonds at an annual coupon rate of 8.0%, 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 0.130. (Assume there is no difference between the pre-tax and after-tax accounts payable
cost.)
What is the NPV of the new plant? Assume that RC has a 34% tax rate. (Enter the answer in dollars. Do not round intermediate
calculations. Round the WACC percentage to 2 decimal places. Round the final answer to 2 decimal places. Omit $ sign in your
response.)
NPV
$
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