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A firm has a capital structure that is 75% equity and 25% debt. They would like...

A firm has a capital structure that is 75% equity and 25% debt. They would like to buy some machinery that would cost $1,500,000. The firm has a flotation cost of equity of 6.5% and a flotation cost of debt of 5.75%. If they buy the equipment, how much will the firm have to pay in flotation costs? Assume that the firm maintains their current capital structure. Please do in Excel.

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Expert Solution

Investment amount       1500000          
                  
Amount raised = Net capital /(1-flotation cost %)                  
                  
Flotation cost = Amount raised * flotation cost %                  
                  
                  
       Amount net of Flotation cost   Flotation cost %   Amount raised   Flotation cost
                  
Equity   75%   1125000   6.50%   1203208.556   78208.55615
Debt   25%   375000   7.50%   405405.4054   30405.40541
                  
                  
Total                   108613.9616

Total Flotation cost is $108613.96

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jeff jeffy answered 6 months ago
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