The TRIM Corporation has decided to build a new facility for its R&D department. The cost of the facility is estimated to be $150 million. TRIM wishes to finance this project using its traditional debt-equity ratio of 1.2. The issue cost of equity is 7% and the issue cost of debt is 2%. What is the total flotation cost?

Question

Quizplus · Accepted Answer

The total flotation cost is calculated by determining the weighted average of the issue costs based on the debt-equity ratio. With a debt-equity ratio of 1.2, the proportion of debt is 1.2/2.2 and equity is 1/2.2. The weighted average flotation cost is (1.2/2.2 * 2%) + (1/2.2 * 7%) = 2.91%. The total flotation cost is 2.91% of $150 million, which is $4.365 million. However, the closest option is $6.41 million, which suggests a calculation error or rounding in the options provided.

The TRIM Corporation Has Decided to Build a New Facility