Suppose the Tripleday Printing company is currently at its target debt-ratio of 100 percent. It is considering
Question:
Suppose the Tripleday Printing company is currently at its target debt-ratio of 100 percent. It is considering building a new 500,000 printing plant in Kansas. This new plant is expected to generate after-tax cash flows of 73,150$ per year forever. The tax rate is 34 percent. There are two financing options:
A 500,000$ new issue of common stock: the issuance costs of the new common stock would be about 10 percent of the amount raised. The required return on the company’s new equity is 20 percent.
A 500,000$ issue of 30-year bonds: the issuance costs of the new debt would be 2 percent of the proceeds. The company can raise new debt at 10 percent.
What is the NPV of the new printing plant?
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers