BT Corporation has decided to build a new facility for its R&D department.The cost of the facility is estimated at $125 million.The firm plans to finance this project using its traditional debt-equity ratio of .65.The issue cost of equity is 6.1 percent and the issue cost of debt is 1.8 percent.What is the amount of the total flotation cost?

Question

Quizplus · Accepted Answer

The total flotation cost is calculated by determining the proportion of financing from debt and equity, applying the respective issue costs, and summing them up. The equity portion is 1/(1+0.65) and the debt portion is 0.65/(1+0.65). The total flotation cost is: ($125 million * 1/(1+0.65) * 6.1%) + ($125 million * 0.65/(1+0.65) * 1.8%) = $5,761,428.

BT Corporation Has Decided to Build a New Facility for Its