You are considering a project which requires $136,000 in external financing. The flotation cost of
equity is 11 percent and the cost of debt is 4.5 percent. You wish to maintain a debt-equity ratio of45. What is the initial cost of the project including the ﬂotation costs?

Question

Quizplus · Accepted Answer

To maintain a debt-equity ratio of 0.45, the equity portion is $93,793 and the debt portion is $42,207. The flotation cost for equity is $10,317.23 (11% of $93,793), and for debt is $1,899.32 (4.5% of $42,207). Adding these flotation costs to the required financing gives a total initial cost of $149,422.55, rounded to $149,422.

You Are Considering a Project Which Requires $136,000 in External