Your ﬁrm is considering a project which requires an initial investment of $5 million. Your target D/E ratio is 0.67. Flotation costs for equity are 8% and ﬂotation costs for debt are 2%. What is the true
Cost (in dollars) of the project when you consider ﬂotation costs?

Question

Quizplus · Accepted Answer

The true cost of the project is the initial investment plus the flotation costs. The flotation costs are the costs of issuing new securities. In this case, the flotation costs for equity are 8% and the flotation costs for debt are 2%. The initial investment is $5 million. The flotation costs for equity are $5 million * 0.08 = $400,000. The flotation costs for debt are $5 million * 0.02 = $100,000. The true cost of the project is $5 million + $400,000 + $100,000 = $5.5 million.

Your ﬁRm Is Considering a Project Which Requires an Initial