Yesteryear Productions is considering a project with an initial costs of $318,000. The firm maintains a debt-equity ratio of .60 and has a flotation cost of debt of 5.2 percent and a flotation cost of equity of 11.1 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 adjusting the initial cost with the weighted average flotation cost. Since the firm has sufficient internally generated equity, only the flotation cost of debt is considered. The debt-equity ratio of 0.60 implies the weight of debt is 0.6/(1+0.6) = 0.375. The flotation cost of debt is 5.2%, so the adjusted cost is $318,000 * (1 + 0.375 * 0.052) = $324,324.

Yesteryear Productions Is Considering a Project with an Initial Costs