Your company is considering a project that will cost $100. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10% and the firm's D/A ratio is .40. The flotation cost for equity is 3%, the flotation cost for debt is 2%, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the weighted-average flotation cost for the firm?

Question

Quizplus · Accepted Answer

The weighted-average flotation cost is calculated by taking into account the proportion of debt and equity in the firm's capital structure and their respective flotation costs. With a D/A ratio of 0.40, the equity ratio is 0.60. The weighted-average flotation cost is (0.60 * 3%) + (0.40 * 2%) = 2.6%.

Your Company Is Considering a Project That Will Cost $100