KCE Co. is operating at its target capital structure with market values of $110 million in equity and $175 million in debt outstanding. KCE plans to finance a new $32 million project using the same relative weights of debt and equity. Ignoring flotation costs, how much new debt must be issued to fund the project?

Question

Quizplus · Accepted Answer

The total market value of the company is $110 million (equity) + $175 million (debt) = $285 million. The weight of the debt in the capital structure is $175 million / $285 million = 0.614. To finance the $32 million project with the same weights, the amount of new debt needed is 0.614 * $32 million = $19.648 million, which rounds to $19.6 million.

KCE Co Is Operating at Its Target Capital Structure with Market