West Minster Properties is considering a project which has an initial startup cost of $840,000. The ﬁrm maintains a debt-equity ratio of .60. The ﬂotation cost of debt is 8 percent and the ﬂotation cost
Of equity is 13 percent. The ﬁrm has suﬃcient internally generated equity to cover the equity cost of
This project. What is the initial cost of the project including the ﬂotation costs?

Question

Quizplus · Accepted Answer

The initial cost of the project including flotation costs is calculated by considering the proportion of debt and equity used to finance the project and their respective flotation costs. With a debt-equity ratio of 0.60, the proportion of debt is 0.60/1.60 and equity is 1/1.60. The cost of debt is $840,000 * (0.60/1.60) * 1.08 and the cost of equity is $840,000 * (1/1.60). Adding these gives the total initial cost including flotation costs.

West Minster Properties Is Considering a Project Which Has an Initial