Hartley, Inc. needs to purchase equipment for its 2,000 drive-ins nationwide. The total cost of the equipment is $2 million. It is estimated that the after-tax cash inﬂows from the project will be
$210,000 annually in perpetuity. Hartley has a market value debt-to-assets ratio of 40%. The ﬁrm's
Cost of equity is 13%, its pre-tax cost of debt is 8%, and the ﬂotation costs of debt and equity are 2%
And 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the ﬁrm's existing
Operations.
What is the weighted average ﬂotation cost for Hartley?

Question

Quizplus · Accepted Answer

The weighted average flotation cost is calculated using the formula: (E/V * flotation cost of equity) + (D/V * flotation cost of debt). Here, E/V = 60% (equity portion), D/V = 40% (debt portion), flotation cost of equity = 8%, and flotation cost of debt = 2%. So, (0.6 * 8%) + (0.4 * 2%) = 4.8% + 0.8% = 5.6%.