Question

(Related to Checkpoint 14.4) (Flotation costs and NPV analysis) The Faraway Moving Company is involved in a major plant expansion that involves the expenditure of $222 million in the coming year. The firm plans on financing the expansion through the retention of $133 million in firm earnings and by borrowing the remaining $89 million. In return for helping sell the $89 million in new debt, the firm's investment banker charges a fee of 200 basis points (where one basis point is 0.01 percent). If Faraway decides to adjust for these flotation costs by adding them to the initial outlay, what will the initial outlay for the project be? The flotation cost adjusted initial outlay is $ . (Round to the nearest dollar.)

Answer 1

Flotation fee = amount of debt*Fees %/ % raised after fees

= $89000000*2%/98% = 1816326.53

Flotation cost adjusted initial outlay = 222,000,000+1816326.53=

223816326.53