Your company is considering a project that will cost $175. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.62. The flotation cost for equity is 5 percent, the flotation cost for debt is 3 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the firm's flotation-adjusted cash flow in year 0?

Question

Quizplus · Accepted Answer

The flotation-adjusted cash flow in year 0 is calculated by adjusting the initial project cost for flotation costs. The equity portion is 1 - 0.62 = 0.38. The flotation cost for equity is 5%, and for debt is 3%. The adjusted cost is $175 + (0.38 * 5% * $175) + (0.62 * 3% * $175) = $181.84.

Your Company Is Considering a Project That Will Cost $175