Flotation cost Goodbye, Inc., recently issued new securities to financ

QUESTION

Flotation cost Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $10.5 million, and the company paid $750,000 in flotation costs. In addition, the equity issued had a flotation cost of 8 percent of the amount raised, whereas the debt issued had a flotation cost of 3 percent of the amount raised. If Goodbye issued new securities in the same proportion as its target capital structure, what is the companys target debt-equity ratio?
The total cost of floatation including floatation cost was Total costs=Cost of equipment + Floatation cost 10,500,000+750,000=$11,250,000 Use the euquation to get the total cost including floatation costs, we get $11,250,000(1-ft) = $10,500,000 1-ft=10,500,000/11,250,000 = 0.933 ft=1-0.933=0.0677 or 6.77% Value of weighted average floatation costs is 6.77% The equation to find the percentage =0.08(E/V) +¦

/V)”-(1) Multiply the above equation by V/E 0.0677(V/E) = 0.08+0.03(D/E) The above equation can be written as 0.0677(1+D/E)=0.08+0.03(D/E) 0.0677+0.0677(D/E) = 0.08+0.03(D/E) (0.0677-0.03)(D/E) = 0.08-0.0677 D/E= (0.08-0.0677)/(0.0677-0.03) Value of debt equity ratio=0.3263

ANSWER:

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