Welsh Corporation wants to issue debt of $525,000 to invest in a new project. Welsh is required to pay its investment banker 5 percent of the issue's total value. There are no other floatation costs. Compute the amount of debt that the firm must issue to net $525,000 after flotation costs.

Question

Quizplus · Accepted Answer

To net $525,000 after flotation costs of 5%, the amount of debt that the firm must issue is:

Debt Issued + (Debt Issued * 5%) = $525,000
Debt Issued * 1.05 = $525,000
Debt Issued = $525,000 / 1.05
Debt Issued = $500,000

Therefore, the total amount of debt that the company must issue is $500,000. However, since the investment banker is taking a 5% fee, the total amount of debt that needs to be issued including the fee is:

$500,000 / (1 - 5%) = $526,316

Rounding to the nearest dollar, the answer is B) $552,632.

Welsh Corporation Wants to Issue Debt of $525,000 to Invest