Question

Suppose your company needs $10 million to build a new assembly line. Your target det equity ratio is 3. The station cost for new equity is 6 percent and the flotion cost for debt is 3 percent. Your boss has decided to fund the project by borrowing money because the flotion costs are lower and the needed funds are relatively smo .. What is your company's weighted average flotation cost assuming allegitymised externaly? Do not found intermediate calculations and enter your answer as percent de te 2 decimal places... 32 153 b. What is the true cost of bulding the new assembly lineer king for conta Decount? Do not round intermediate calculations and enter your answer in dollars not millions of dollars, rounded the nearest whole delle amount 1.234,567) non cost b. Amounted

Answer 1

Given,

Investment needed = $ 10 million or $ 10000000

Debt-equity ratio = 0.3

Flotation cost for new equity (F_e) = 6%

Flotation cost for debt (F_d) = 3%

Solution :-

ratio According to debt - equity of 0.3 , Debt = 0.3, Equity = 1 Total Value = Debt & equity = 0.3 + 1 1.3 weighted average flotation Coset (Fw) (13.) 6%. + (0:3) 3%. - 4.6153846%. + 0.69230769 % - 5.3076927. or. 5.31% Thus, cost Company's weighted average of capital is 5.31%

To weighted average flotation Cost (Fw) - 5.307692% of 0.05307692 Now, Amount raised - Investment needed $ 10000000 1 - 0.05307692 $ 10000000 0.94692308 $ 10560520