UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 13, Problem 14QP
Calculating Flotation Costs Suppose your company needs $35 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation
- a. What do you think about the rationale behind borrowing the entire amount'!
- b. What is your company’s weighted average flotation cost, assuming all equity is raised externally?
- c. What is the true cost of building the new assembly line after taking flotation costs into account? Does it matter in this case that the entire amount is being raised from debt?
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Suppose your company needs $18 million to build a new assembly line. Your target debt-
equity ratio is .7. The flotation cost for new equity is 7 percent, but the flotation cost for
debt is only 4 percent. Your boss has decided to fund the project by borrowing money
because the flotation costs are lower and the needed funds are relatively small.
a. What is your company's weighted average flotation cost, assuming all equity is raised
externally? (Do not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b. What is the true cost of building the new assembly line after taking flotation costs into
account? (Do not round intermediate calculations and enter your answer in dollars,
not millions, rounded to the nearest whole number, e.g., 1,234,567.)
a. Flotation cost
b. Amount
raised
GA
5.77 %
19 X
Suppose your company needs $10 million to build a new assembly line. Your target debt-
equity ratio is .4. The flotation cost for new equity is 10 percent, but the flotation cost for
debt is only 7 percent. Your boss has decided to fund the project by borrowing money
because the flotation costs are lower and the needed funds are relatively small.
a. What is your company's weighted average flotation cost, assuming all equity is raised
externally? (Do not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b. What is the true cost of building the new assembly line after taking flotation costs into
account? (Do not round intermediate calculations and enter your answer in dollars,
not millions, rounded to the nearest whole number, e.g., 1,234,567.)
Answer is complete but not entirely correct.
9.73 %
a. Flotation cost
b. Amount
raised
11,010,000
4
Suppose your company needs $43 million to build a new assembly line. Your target
debt-equity ratio is .75. The flotation cost for new equity is 6 percent, but the flotation
cost for debt is only 2 percent. Your boss has decided to fund the project by borrowing
money because the flotation costs are lower and the needed funds are relatively small.
a. What is your company's weighted average flotation cost, assuming all equity is raised
externally? (Do not round intermediate calculations and enter your answer as a
percent round to 2 decimal places, e.g., 32.16.)
b. What is the true cost of building the new assembly line after taking flotation costs into
account? (Do not round intermediate calculations and enter your answer in dollars,
not millions, rounded to the nearest whole number, e.g., 1,234,567.)
a. Flotation cost
b. Amount raised
Chapter 13 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQCh. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQCh. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...
Ch. 13 - Calculating Cost of Equity The Dybvig Corporations...Ch. 13 - Prob. 2QPCh. 13 - Calculating Cost of Debt Shanken Corp. issued a...Ch. 13 - Calculating Cost of Debt For the firm in the...Ch. 13 - Calculating WACC Mullineaux Corporation has a...Ch. 13 - Taxes and WACC Miller Manufacturing has a target...Ch. 13 - Finding the Capital Structure Farnas Llamas has a...Ch. 13 - Book Value versus Market Value Filer Manufacturing...Ch. 13 - Calculating the WACC In the previous problem,...Ch. 13 - Prob. 10QPCh. 13 - Finding the WACC Given the following information...Ch. 13 - Finding the WACC Titan Mining Corporation has 8.7...Ch. 13 - SML and WACC An all-equity firm is considering the...Ch. 13 - Calculating Flotation Costs Suppose your company...Ch. 13 - Calculating Flotation Costs Southern Alliance...Ch. 13 - WACC and NPV Och, Inc., is considering a project...Ch. 13 - Prob. 17QPCh. 13 - Flotation Costs Goodbye, Inc., recently issued new...Ch. 13 - Calculating the Cost of Equity Floyd Industries...Ch. 13 - Firm Valuation Schultz Industries is considering...Ch. 13 - Prob. 21QPCh. 13 - Flotation Costs and NPV Photochronograph...Ch. 13 - Flotation Costs Trower Corp. has a debt-equity...Ch. 13 - Project Evaluation This is a comprehensive project...Ch. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Go to www.reuters.com and find the list of...Ch. 13 - You now need to calculate the cost of debt for...Ch. 13 - You now have all the necessary information to...Ch. 13 - You used Tesla as a representative company to...
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