Asian Foods needs $110,000 for a new project.The firm has a target capital structure of 30 percent debt and 70 percent external equity.The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity.What amount does the firm need to raise?

Question

Quizplus · Accepted Answer

To find the amount the firm needs to raise, we calculate the weighted average flotation cost and adjust the project cost accordingly. The weighted flotation cost is (0.30 * 5.25%) + (0.70 * 10.15%) = 8.365%. The amount to raise is $110,000 / (1 - 0.08365) = $120,455.54.

Asian Foods Needs $110,000 for a New Project