Asked by
Kristina Johnson
on Dec 09, 2024
Verified
Your firm is considering a project which requires an initial investment of $5 million. Your target D/E ratio is 0.67. Flotation costs for equity are 8% and flotation costs for debt are 2%. What is the true cost (in dollars) of the project when you consider flotation costs?
A) $5.00 million
B) $5.24 million
C) $5.30 million
D) $5.57 million
E) $5.61 million
Flotation Costs
The expenses incurred by a company in issuing new securities, including legal, administrative, underwriting fees, and other associated costs.
Debt-Equity Ratio
An economic indicator showing the comparative mix of owner's equity and loans in funding a company's assets.
External Financing
Funds raised from outside the business, typically through borrowing or the issuance of equity.
- Appreciate the significance of flotation costs in project finance and master the technique for calculating the project's initial costs that include flotation expenses.
- Master the foundational aspects of capital structure, including how debt-to-equity ratios affect financing strategies.
Verified Answer
CB
Learning Objectives
- Appreciate the significance of flotation costs in project finance and master the technique for calculating the project's initial costs that include flotation expenses.
- Master the foundational aspects of capital structure, including how debt-to-equity ratios affect financing strategies.