The Daily Brew has a debt-equity ratio of 0.72. The firm is analyzing a new project which requires an initial cash outlay of $420,000 for equipment. The flotation cost is 9.6 percent for equity and 5.4 percent for debt. What is the initial cost of the project including the flotation costs?

Question

Quizplus · Accepted Answer

Average flotation cost = (1/1.72) (0.096) + (0.72/1.72) (0.054) = 0.0784186Initial cost = $420,000/(1 - 0.0784186) = $455,738

The Daily Brew Has a Debt-Equity Ratio of 0