You are evaluating a project which requires $230,000 in external financing.The flotation cost of equity is 11.6 percent and the flotation cost of debt is 5.4 percent.What is the initial cost of the project including the flotation costs if you maintain a debt-equity ratio of 0.45?

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Quizplus · Accepted Answer

Average flotation cost = (1/1.45) (0.116) + (0.45/1.45) (0.054) = 0.0967586Initial cost = $230,000/(1 - 0.0967586) = $254,638

You Are Evaluating a Project Which Requires $230,000 in External