Southwest Tours needs $80,000 for a new project.The firm has a target capital structure of 25 percent debt and 75 percent equity.The flotation cost of debt is 5 percent compared to 10.25 percent for equity.What amount does the firm need to raise if it generates sufficient internal equity to cover the equity need?

Question

Quizplus · Accepted Answer

ƒ₀ = .75 × 0 + .25 × .05 = .0125Amount raised = $80,000/(1 - .0125)= $81,012.66

Southwest Tours Needs $80,000 for a New Project