Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 13, Problem 23QP
Flotation Costs Trower Corp. has a debt-equity ratio of .85. The company is considering a new plant that will cost $145 million to build. When the company issues new equity, it incurs a flotation cost of 8 percent. The flotation cost on new debt is 3.5 percent. What is the initial cost of the plant if the company raises all equity externally'! What if it typically uses 60 percent retained earnings? What if all equity investments are financed through retained earnings?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Your company is evaluating a new factory that will cost $14 million to build. Your target debt-equity
ratio is 1. The flotation cost for new equity is 7% and the flotation cost for new debt is 4%. The
company is planning to use retained earnings for 50% of the equity financing. What are the weighted
average flotation costs as a fraction of the amount invested? What are the flotation costs (in $ million
)?
Flotation Costs
Lucas Corp. has a debt-equity ratio of .65. The company
is considering a new plant that will cost $51 million to build. When the company
issues new equity, it incurs a flotation cost of 7 percent. The flotation cost on new
debt is 2.7 percent. What is the initial cost of the plant if the company raises all equity
externally? What if it typically uses 60 percent retained earnings? What if all equity
investment is financed through retained earnings?
Herriman Solutions needs $14.4 million to build a new assembly line. The company's target debt-equity ratio is 1.08. The flotation cost
for new equity is 10.2 percent, but the floatation cost for debt is only 5.7 percent. The company has sufficient resources to finance the
equity portion of the assembly line internally. What is the true cost of building the new assembly line after taking flotation costs into
account?
Total initial cost = $
Allowed aftemots 3
Item
Item
Item
Item
Show
Chapter 13 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQCh. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQCh. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...
Ch. 13 - Calculating Cost of Equity The Dybvig Corporations...Ch. 13 - Prob. 2QPCh. 13 - Calculating Cost of Debt Shanken Corp. issued a...Ch. 13 - Calculating Cost of Debt For the firm in the...Ch. 13 - Calculating WACC Mullineaux Corporation has a...Ch. 13 - Taxes and WACC Miller Manufacturing has a target...Ch. 13 - Finding the Capital Structure Farnas Llamas has a...Ch. 13 - Book Value versus Market Value Filer Manufacturing...Ch. 13 - Calculating the WACC In the previous problem,...Ch. 13 - Prob. 10QPCh. 13 - Finding the WACC Given the following information...Ch. 13 - Finding the WACC Titan Mining Corporation has 8.7...Ch. 13 - SML and WACC An all-equity firm is considering the...Ch. 13 - Calculating Flotation Costs Suppose your company...Ch. 13 - Calculating Flotation Costs Southern Alliance...Ch. 13 - WACC and NPV Och, Inc., is considering a project...Ch. 13 - Prob. 17QPCh. 13 - Flotation Costs Goodbye, Inc., recently issued new...Ch. 13 - Calculating the Cost of Equity Floyd Industries...Ch. 13 - Firm Valuation Schultz Industries is considering...Ch. 13 - Prob. 21QPCh. 13 - Flotation Costs and NPV Photochronograph...Ch. 13 - Flotation Costs Trower Corp. has a debt-equity...Ch. 13 - Project Evaluation This is a comprehensive project...Ch. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Go to www.reuters.com and find the list of...Ch. 13 - You now need to calculate the cost of debt for...Ch. 13 - You now have all the necessary information to...Ch. 13 - You used Tesla as a representative company to...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- RETURN ON EQUITY Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income will be operating income. If it so chooses, CCC can finance up to 50% of its assets with debt, which will have an 8% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock willbe used. Assuming a 40% tax rate on all taxable income, what is the difference between CCC’s expected ROE if it finances these assets with 50% debt versus its expected ROE if it finances these assets entirely with common stock?arrow_forwardGive typing answer with explanation and conclusion Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 3% every year there after. Rose currently maintains a debt to equity ratio of 1, its marginal tax rate is 40%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. Rose's unlevered cost of capital is closest to: 9.0% 8% 7.0% 7.5%arrow_forwardThe impact of financial leverage on return on equity and earnings per share Consider the following case of Green Rabbit Transportation Inc.: Suppose Green Rabbit Transportation Inc. is considering a project that will require $200,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. • Common equity outstanding will be 15,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Green Rabbit Transportation Inc.’s return on equity (ROE) on the project will be . In addition, Green Rabbit’s earnings per share (EPS) will be . Alternatively, Green Rabbit Transportation Inc.’s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company’s debt will be 12%. Because the company will finance only 50% of…arrow_forward
- Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.50 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.5%, a debt cost of capital of 7.0%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? A divestiture would be profitable if Goodyear received more than $ million after tax. (Round to one decimal place.)arrow_forwardSuppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.46 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.7%, a debt cost of capital of 6.8%, a marginal corporate tax rate of 38%, and a debt-equity ratio of 2.5. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? A divestiture would be profitable if Goodyear received more than how much after tax? (Round to one decimal place.)arrow_forwardSuppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.51 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.7%, a debt cost of capital of 6.9%, a marginal corporate tax rate of 37%, and a debt-equity ratio of 2.8. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable?arrow_forward
- es Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 11 percent return and can be financed at 6 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 9 percent return but would cost 15 percent to finance through common equity. Assume debt and common equity each represents 50 percent of the firm's capital structure. a. Compute the weighted average cost of capital. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Weighted average cost of capital % b. Which project(s) should be accepted? Piece of equipment New machinearrow_forwardPro forma balance sheet. Next year, California Cement Company will increase its plant, property, and equipment by $6,065,000 with a plant expansion. The inventories will grow by 82%, accounts receivable will grow by 69%, and marketable securities will be reduced by 65% to help finance the expansion. Assume all other asset accounts will remain the same and the company will use long-term debt to finance the remaining expansion costs (no change in common stock or retainedearnings). Using this information and the balance sheet , for California Cement Company for 2013, prepare a pro forma balance sheet for 2014. How much additional debt will the company need using this pro forma balance sheet? Complete the pro-forma balance sheet for 2014 below: (Round to the nearest dollar.) California Cement Company Balance Sheet for the Year Ending December 31, 2013 ASSETS LIABILITIES Current assets Current liabilities Cash $ 1,471,000…arrow_forwardSuppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.41 million per year, growing at a rate of 2.3% per year. Goodyear has an equity cost of capital of 8.4%, a debt cost of capital of 7.2%, a marginal corporate tax rate of 32%, and a debt-equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? A divestiture would be profitable if Goodyear received more than $enter your response here million after tax. (Round to one decimal place.)arrow_forward
- Dyrdek Enterprises has equity with a market value of $1.8 million and the market value of debt is $3.55 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.6 percent. The new project will cost $2.20 million today and provide annual cash flows of $576,000 for the next 6 years. The company's cost of equity is 11.07 percent and the pretax cost of debt is 4.88 percent. The tax rate is 21 percent. What is the project's NPV?arrow_forwardA firm needs to raise $650 million for a project; external equity financing will be required. The firm faces flotation costs of 8.0% for equity and 2.0% for debt. If the debt to equity ratio is 0.75, the average flotation cost incurred by the firm will be ________ %arrow_forwardSuppose that Rose Industries is considering the acquisition of another firm in its industry for $137 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 4% every year thereafter. Rose currently maintains a debt to equity ratio of 1, its corporate tax rate is 21%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. The Free Cash Flow to Equity (FCFE) for the acquisition in year O is closest to ($ Million) (2 decimal places):arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY