The BIM Corporation has decided to build a new facility for its R&D department. The cost of the facility is estimated to be $125 million. BIM wishes to finance this project using its traditional debt-equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total flotation cost?

Question

Quizplus · Accepted Answer

The total flotation cost is calculated by finding the weighted average of the issue costs based on the debt-equity ratio. With a debt-equity ratio of 1.5, the weights are 60% debt and 40% equity. The total flotation cost is 0.6 * 1% + 0.4 * 6% = 3.0%. Therefore, the total flotation cost is 3.0% of $125 million, which is $3.75 million.

The BIM Corporation Has Decided to Build a New Facility