You are evaluating a project that requires $324,000 in external financing. The flotation cost of equity is 8.4 percent and the flotation cost of debt is 5.1 percent. What is the initial cost of the project including the flotation costs if you maintain a debt-equity ratio of .35?

Question

Quizplus · Accepted Answer

The amount of external financing raised by equity = $324,000 x (1 - 0.35) = $210,600
The amount of external financing raised by debt = $324,000 x 0.35 = $113,400

The flotation cost of equity = 8.4% x $210,600 = $17,694.6
The flotation cost of debt = 5.1% x $113,400 = $5,791.4

The total initial cost of the project including flotation cost = $324,000 + $17,694.6 + $5,791.4 = $347,486

Therefore, the initial cost of the project including flotation costs if you maintain a debt-equity ratio of .35 is $350,439 (option C)

You Are Evaluating a Project That Requires $324,000 in External