Plat Tools Corporation (PTC) has a target capital structure of 40% deb

QUESTION

Plat Tools Corporation (PTC) has a target capital structure of 40% debt and 60% equity. The marginal tax rate is 40%. The cost of debt is 8%, The company?s shares trade at 20 per share. Next year?s expected dividend is 2.00 per share and its long-term dividend growth rate is 5%. If new e¦
First find the floatation costs. The firm needs to raise equity of 60% x 35,000,000, or 21,000,000. To raise this amount net of floatation costs, the firm has issue 22,340,426 (21,000,000 / 0.94) in new shares. After paying 6% or 1,340,426, to the net proceeds are the 21,000,000. Thus, the cost of the issuance is 1,340,426 (22,340,426 “ 21,000,000). Next the WACC without the issue cost if found: WACC = wDrD(1-t) wPrP wCErCE The NPV is found with floatation cost being treated as an¦

al cash outflow; thus, the initial outlay is 1,340,426 35,000,000 = 36,340,426: 10 NPV = -36,340,426 S6,100,000/ (1.1092)t = -295,282 t=1 Thus, the NPV is negative and the project should not be undertaken. This approach more accurately reflects the full cost of the new financing. The other method misses a portion of this cost

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