Zee's Toy Store needs $242,000 for expansion.The firm has a target capital structure of 45 percent debt and 55 percent external equity.The flotation cost of debt is 5.2 percent compared to 8.5 percent for equity.What amount does the firm need to raise to fund the expansion?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of debt and equity needed.

Debt = 0.45 x $242,000 = $108,900 
Equity = 0.55 x $242,000 = $133,100

Next, we need to adjust for the flotation costs.

Flotation cost of debt = 5.2%
Flotation cost of equity = 8.5%

Adjusted debt = $108,900 / (1 - 0.052) = $114,835 
Adjusted equity = $133,100 / (1 - 0.085) = $145,205

Total amount needed = $114,835 + $145,205 = $260,040

So, the closest answer choice is C: $260,257.03.

Zee's Toy Store Needs $242,000 for Expansion