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.Calculate Jen and Barry's weighted average flotation cost.

Question

Quizplus · Accepted Answer

The weighted average flotation cost is calculated by weighting the flotation costs of debt and equity by their respective proportions in the total financing mix. For debt, the flotation cost is 3% of 40%, and for equity, it is 9% of 60%. The calculation is as follows: (0.40 * 3%) + (0.60 * 9%) = 1.2% + 5.4% = 6.6%.

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