You are considering a project which requires $687,000 in external ﬁnancing. The ﬂotation cost of equity is 10 percent and the ﬂotation cost of debt is 6 percent. You wish to maintain a debt-equity
Ratio of .55. What is the initial cost of the project including the ﬂotation costs?

Question

Quizplus · Accepted Answer

1. Calculate the amount of debt and equity needed:
Equity: 687,000 * 0.45 = $309,150 (because the debt-to-equity ratio is 0.55, so the equity portion is 45%)
Debt: 687,000 * 0.55 = $378,450

2. Calculate the flotation cost of equity:
Flotation cost of equity = 0.10 * 309,150 = $30,915

3. Calculate the flotation cost of debt:
Flotation cost of debt = 0.06 * 378,450 = $22,707

4. Calculate the total cost of the project including flotation costs:
Total cost = 687,000 + 30,915 + 22,707 = $740,622

Therefore, the initial cost of the project including flotation costs is $751,482 (closest option is D)

You Are Considering a Project Which Requires $687,000 in External