Question

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You are considering a project which requires $136,000 in external financing. The flotation cost of equity...

You are considering a project which requires $136,000 in external financing. The flotation cost of equity is 11 % and the cost of debt is 4.5 %. You wish to maintain a debt-equity ratio of.45. What is the initial cost of the project including the flotation costs?

Multiple Choice

  • $149,422

  • $143,367

  • $155,283

  • $138,009

  • $154,004

Solutions

Expert Solution

Calculation of weight
Debt 45% 45%/145% 31.03%
Equity 100% 100%/145% 68.97%
Total 145%
Calculation of Floatation cost
Project cost 136000
Assumed total floatation cost X
Total funding required (136000+X)
Source Weight Flotation cost Flotation cost Flotation cost Flotation cost
Debt (136000+X)*31.03% 4.50% (136000+X)*31.03%*4.5% (136000+X)*1.40% 1899.31+ 0.014 X
Equity (136000+X)*68.97% 11.00% (136000+X)*68.97%*11% (136000+X)*7.59% 10317.24+ 0.076 X
Total 12216.55+0.0898 X
Total floatation cost so computed is equal to the assumed total fixed cost of X
12216.55+0.0898 X= X
(1-0.0898) * X= 12216.55172
X= 12216.5517241379/0.910172413793103
X= $                    13,422
So total cost including flotation cost= 136000+13422
So total cost including flotation cost= $                  149,422
So option 1 is the right answer.

jeff jeffy answered 2 years ago
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