Question

Yesteryear Productions is considering a project with an initial costs of $318,000. The firm maintains a debt-equity ratio of .60 and has a flotation cost of debt of 5.2 percent and a flotation cost of equity of 11.1 percent. The firm has sufficient internally generated equity to cover the equity cost of this project. What is the initial cost of the project including the flotation costs?

Answer 1

Answer:

amount raised = $324324

Explanation:

given data

initial costs = $318,000

debt equity ratio = 0.60

flotation cost of debt = 5.2 percent

flotation cost of equity = 11.1 percent

to find out

What is the initial cost of the project including the flotation costs

solution

Let Equity be 1

so Debt = 1 × 0.60 = 0.6

so weight of Debt = $\frac{0.6}{1+0.6}$

weight of Debt = 0.375

and weight of equity = 1 - 0.375 = 0.625

so now we find here average of flotation cost that is

average of flotation cost = 0.625 ×0% × 11.1 + 0.375×5.2 %

here retained earned 100 % so that external equity = 0%

average of flotation cost = 1.950 %

so amount raised is

amount raised = $\frac{inittial\ cost}{1- average\ floating\ cost}$  

amount raised = $\frac{318000}{1- 0.0195}$  

amount raised = $324324