ABC, Inc. has a debt-equity ratio of 80%. The firm is analyzing
a new project which requires an initial cash outlay of $300,000 for
new equipment. The flotation cost for new equity is 9 % and for
debt 4.5 %. (a) What is the weighted average flotation cost? (b)
What is the initial cost of the project including the flotation
costs?
a. Assume equity is 1
Debt equity ratio = Debt / Equity
0.8 = Debt / 1
Debt = 0.8
Equity = 1
Debt + Equity = 1.8
Weighted average floatation cost = (9% *1/ 1.8) +(4.5% * 0.8/ 1.8) = 7%
b. Initial cost = 300,000/ (1-7%) = 322,581 (rounded off)
ABC, Inc. has a debt-equity ratio of 80%. The firm is analyzing a new project which...
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