Question

If a firm has a cost of equity of 15 percent, and the firm is 100 percent equity financed. The firm is contemplating a $150 million expansion of its existing operations, funded by selling new stock.

Flotation costs will run 10 percent of the amount issued. When flotation costs are considered, what is the cost of expansion?

Multiple Choice

A. $135 million

B. $150 million

C. $166.67 million

D. $175 million

E. $185.67 million

Answer 1

Option C

Cost of expansion = Flotation cost+ 150 m

let the cost of expansion be C

C = 0.1C+150

0.9C = 150

C = 150/0.9 = $166.67 million

= 15%*150m +