Question

Lucas Corp. has a debt-equity ratio of .8. The company is considering a new plant that will cost $112 million to build. When the company issues new equity, it incurs a flotation cost of 8.2 percent. The flotation cost on new debt is 3.7 percent.

a.	What is the initial cost of the plant if the company raises all equity externally? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)
b.	What is the initial cost of the plant if the company typically uses 55 percent retained earnings? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)
c.	What is the initial cost of the plant if the company typically uses 100 percent retained earnings? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

Answer 1

Given,

Debt equity ration = 0.8

Plant cost = $112 million or $112000000

Equity flotation cost (F_e) = 8.2% or 0.082

Debt flotation cost (F_d) = 3.7% or 0.037

Solution :-