Chapter 13, Problem 15QAP

Summary Introduction

Adequate information:

Capital required $\left(\text{K}\right)$ = $75,000,000

Weight of common stock $\left({\text{W}}_{\text{CS}}\right)$ = 70%

Weight of preferred stock $\left({\text{W}}_{\text{PS}}\right)$ = 5%

Weight of debt $\left({\text{W}}_{\text{d}}\right)$ = 25%

Flotation cost of common stock $\left({\text{f}}_{\text{CS}}\right)$ = 7%

Flotation cost of preferred stock $\left({\text{f}}_{\text{PS}}\right)$ = 4%

Flotation cost of debt $\left({\text{f}}_{\text{d}}\right)$ = 3%

To compute: True initial cost for the company S.

Introduction: Weighted average flotation cost is the determination of the proportion of the project to be financed with equity and the proportion to be financed with debt.