Finanical Management Essay Example | Topics and Well Written Essays - 2500 words

Finanical Management - Essay Example manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 1.3. It is considering building a new 45million manufacturing facility. This new plant is expected to generate after-tax cash flows of 5.7 million to perpetuity. There are three financing options. It will be noted that the flotation charges made from issuing common stock has caused the shortage on the required investment for the new building. Initially, the firm has considered raising funds to finance new building construction, but it seems this option needs some mix re-alignment or additional financing either thru bonds or bank borrowings. Flotation cost is defined as the costs associated with issuance of new securities. It is the portion of the proceeds associated with the size of the spread. It includes costs incurred by the underwriting company in marketing the stocks. Annual coupon rate 9% YTM 20 yrs. Purchase value $950.00 Face value $1000.00 Current yield 9.474% Yield to maturity 9.570% A criterion for evaluation of NPV is when NPV is more than zero, accept the project when it is positive, and when the NPV is negative, reject the project. NPV also gives us an idea if the total net present value can finance the project cost. (Van Horne) M & M contends that capital structure is irrelevant, and that the value of the firm depends on its total asset and not by its capital structures. In the diagram above of two firms, both are levered by equity and debt and have similar financial capital structure. The only difference that could be observed is how they finance their operation. In diagram A, 70% is levered by stock