Flotation Costs and
- 1. A new issue of common stock: The flotation costs of the new common stock would be 8 percent of the amount raised. The required return on the company's new equity is 14 percent.
- 2. A new issue of 20-yec.r bonds: The flotation costs of the new bonds would be 4 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 8 percent, they will sell at par.
- 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.)
What is the NPV of the new plant? Assume that PC has a 35 percent tax rate.
To determine: The NPV of the New Plant.
Introduction: Flotation Costs is an assortment of costs that are related with issuing new securities. Ordinarily these expenses will be greater with bigger offering extents or because of expanded risk with the offering.
Answer to Problem 22QP
The NPV of the New Plant is $6,251,949
Explanation of Solution
Determine the Weight of Accounts Payable
Therefore the Weight of Accounts Payable is 16.67%
Determine the Weight of Long-Term Debt
Therefore the Weight of Long-Term Debt is 83.33%
Determine the WACC
Therefore the WACC is 11.23%
Determine the Weighted Average Floatation Costs
Therefore the Weighted Average Floatation Costs is 6.34%
Determine the Amount Raised
Therefore the Amount Raised is $53,384,582.53
Determine the NPV of the New Plant
Therefore the NPV of the New Plant is $6,277,038.13.
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Chapter 13 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT