The MFC Corporation has decided to build a new facility.It estimates the cost of the facility at $9.7 million.MFC wishes to finance this project using its traditional debt-to-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 of raising funds?

Question

Quizplus · Accepted Answer

The total flotation cost is calculated by finding the weighted average of the issue costs based on the debt-to-equity ratio. With a ratio of 1.5, for every $2.5 raised, $1.5 is debt and $1 is equity. The weighted average flotation cost is (1.5/2.5)*1% + (1/2.5)*6% = 2.4%. The total flotation cost is 2.4% of $9.7 million, which is $300,000.

The MFC Corporation Has Decided to Build a New Facility