The Daily Brew has a debt-equity ratio of 0.64.The firm is analyzing a new project which requires an initial cash outlay of $420,000 for equipment.The flotation cost is 9.6 percent for equity and 5.4 percent for debt.What is the initial cost of the project including the flotation costs?

Question

Quizplus · Accepted Answer

Average flotation cost = (1/1.64) (0.096) + (0.64/1.64) (0.054) = 0.0796098Initial cost = $420,000/(1 - 0.0796098) = $456,328

The Daily Brew Has a Debt-Equity Ratio of 0