Question

Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $14.7 million, and the company paid $795,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.7 percent of the amount raised, whereas the debt issued had a flotation cost of 3.7 percent of the amount raised. If the company issued new securities in the same proportion as its target capital structure, what is the company’s target debt–equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

  

Debt–equity ratio

Answer 1

	Cost of Project =			14700000
	Floation cost =			795000
	Total cost =			15495000
	Therefore we have below equation
	Amount raised *(1-total flotation cost %) = After after flotation cost
	=15.495mil *(1-f) = 14.7 mil
	F=	5.13%
	now we have weighted average flotation cost of 5.13% and individual flotation cost of equity and debt
	we can compute the weight now.
	Lets assume weight of debt = x therefore weight of equity = (1-x)
	we have below equation
	5.13%	=weight of equity *7.7%+weight of debt*3.7%
	5.13%	=(1-x) *7.7%+x*3.7%
	5.13%	= 7.7%-7.7%x+3.7%x
	2.57%	=4%x
	X=	64.250%
	therefore debt =		64.250%
	equity=		35.750%
	debt-equity ratio=64.25%/35.75%
			1.80