Chapter 13, Problem 23QAP

Summary Introduction

Adequate information:

Debt-equity ratio $\left(\text{D/E}\right)$ = 0.65

Debt $\left(\text{D}\right)$ = 0.65

Equity $\left(\text{E}\right)$ = 1

Project cost $\left({\text{C}}_{\text{P}}\right)$ = $137,000,000

Equity flotation cost $\left({\text{f}}_{\text{e}}\right)$ = 8%

Debt flotation cost $\left({\text{f}}_{\text{d}}\right)$ = 3.50%

Percentage equity raised internally $\left({\text{Int}}_{\text{Eq}}\right)$ = 60%

Project financed through retained earnings $\left(\text{RE}\right)$ = 1

To compute: Project cost for the company B.

Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.