The BIM Corporation has decided to build a new facility for its R&D department.The cost of the facility is estimated to be €125 million.BIM wishes to ﬁnance this project using its traditional debt-
Equity ratio of 1.5.The issue cost of equity is 6% and the issue cost of debt is 1%.What is the total
ﬂotation cost?

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 up. With a debt-equity ratio of 1.5, the project is financed with 60% debt and 40% equity. The flotation cost is (60% * 1% * €125 million) + (40% * 6% * €125 million) = €0.75 million + €3 million = €3.75 million.

The BIM Corporation Has Decided to Build a New Facility