Kottinger's Kamp Supplies is considering an investment in new manufacturing equipment. The equipment costs $220,000 and will provide annual after-tax inﬂows of $50,000 at the end of each
Of the next seven years. The ﬁrm's market value debt/equity ratio is 25%, its cost of equity is 14%,
And its pre-tax cost of debt is 7%. The ﬂotation costs of debt and equity are 3% and 9%,
Respectively. The ﬁrm's combined marginal federal and provincial tax rate is 40%. Assume the
Project is of approximately the same risk as the ﬁrm's existing operations.
What is the weighted average ﬂotation cost for Kottinger's?

Question

Quizplus · Accepted Answer

The weighted average flotation cost is calculated using the formula: (E/V * Fe) + (D/V * Fd), where E/V is the equity portion, D/V is the debt portion, Fe is the flotation cost of equity, and Fd is the flotation cost of debt. Given the debt/equity ratio of 25%, the equity portion is 80% and the debt portion is 20%. Thus, the calculation is (0.8 * 9%) + (0.2 * 3%) = 7.8%.

Kottinger's Kamp Supplies Is Considering an Investment in New Manufacturing