Jen and Barry's Ice Cream needs $20 million in new capital to expand its production facilities. It will use 40% debt and 60% equity. The company's after-tax cost of debt is 5% and the cost of equity is 12.5%. Flotation costs will be 3% for debt and 9% for equity. Compute Jen and Barry's weighted average flotation cost.

Question

Quizplus · Accepted Answer

The weighted average flotation cost is calculated by multiplying the proportion of each type of financing by its respective flotation cost and then summing these products. For debt: 40% * 3% = 1.2%. For equity: 60% * 9% = 5.4%. Adding these together gives 1.2% + 5.4% = 6.6%.

Jen and Barry's Ice Cream Needs $20 Million in New