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

KCE is operating at its target capital structure, therefore, we can use the current relative weights of debt and equity to calculate the amount of new debt needed to finance the project.

Current capital structure: 
Equity = $110 million 
Debt = $175 million

Total capital = Equity + Debt = $285 million

Using the current weights: 
Equity proportion = Equity / Total capital = $110/$285 = 0.386 
Debt proportion = Debt / Total capital = $175/$285 = 0.614

To finance the new project, KCE will need to maintain its target capital structure, so the proportions of equity and debt should stay the same.

Equity needed = Total cost of project x Equity proportion 
= $32 million x 0.386 = $12.352 million

Debt needed = Total cost of project x Debt proportion 
= $32 million x 0.614 = $19.648 million

Therefore, KCE will need to issue $19.648 million in new debt to fund the project.

The correct answer is C) $19.6 million.

KCE Co Is Operating at Its Target Capital Structure with Market