The MFC Corporation has decided to build a new facility. It estimates the cost of the facility at $9.7 million. MFC wishes to finance this project using its traditional debt-to-equity ratio of 1.5. The issue cost of equity is 6 percent, and the issue cost of debt is 1 percent. What is the total flotation cost of raising funds?
A)$300,000
B)$100,000
C)$600,000
D)$970,000

Question

Quizplus · Accepted Answer

The total flotation cost is calculated by determining the proportion of debt and equity, applying their respective issue costs, and summing them. With a debt-to-equity ratio of 1.5, the project is financed with 60% debt and 40% equity. The flotation cost is (0.6 * $9.7 million * 0.01) + (0.4 * $9.7 million * 0.06) = $58,200 + $232,800 = $291,000, which rounds to $300,000.

The MFC Corporation Has Decided to Build a New Facility