Question

Hartley, Inc. needs to purchase equipment for its 2,000 drive-ins nationwide. The total cost of the equipment is $2 million. It is estimated that the after-tax cash inflows from the project will be $210,000 annually in perpetuity. Hartley has a market value debt-to-assets ratio of 40%. The firm's cost of equity is 13%, its pre-tax cost of debt is 8%, and the flotation costs of debt and equity are 2% and 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the firm's existing operations.

What is the dollar flotation cost for the proposed financing?

Question 1 options:

	$159,001
	$131,230
	$118,644
	$112,000
	$142,098

Answer 1

Solutions Debt to Asset Ratio ( Wd) = 40% So, weight of Debt (Wd)= 40% of 0.4 & weight of Equity (wel=1-Wd = (-0.4 = 0,6 Floatation cost Debt of (Fd) = - 2% Floatation cost of Equity (Fe)-8% Floatation Lost & Weighted Average Wd (Fd ) t We (Fe) (0.4) (27.) +0.0) (8) 0.8%. + 4.8). = = 5,6%

we have calculated weighted Average floatation Lost 5.6.). The net amount to be raised for the equipment $2,000,000 So, the total amount to be raised (including floatation cost) = Net Amount 1 - Weighted Averye floatation cost $ 2,000,000 1-5,6). ll $ 2,000,000 1-0,056 $2,000,000 0.944

1) $ 2,118,644.07 Dollar floatation lost for proposed financing. Total Amount to be raised (including floatation Net Amount for cost of equipment Lost) - $ 2,118,644.07 $ 2,000,000 a $ 118,644.07 or $ 118,644 Answer