Chapter 13, Problem 14QAP

a

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

Capital required $\left(\text{K}\right)$ = $43,000,000

Equity flotation cost $\left({\text{f}}_{\text{e}}\right)$ = 6%

Debt flotation cost $\left({\text{f}}_{\text{d}}\right)$ = 2%

To compute: Rationale behind borrowing the entire amount.

Introduction: Borrowing for a new project is a way for the company to finance the new project using external funds which allows the company to use the internal fund for working capital requirements. Debt financing for the entire project changes the capital structure of the company.

b

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

Capital required $\left(\text{K}\right)$ = $43,000,000

Equity flotation cost $\left({\text{f}}_{\text{e}}\right)$ = 6%

Debt flotation cost $\left({\text{f}}_{\text{d}}\right)$ = 2%

To compute: Weighted average flotation cost

Introduction: Weighted average flotation cost is the determination of the proportion of the project to be financed with equity and the proportion to be financed with debt.

c

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

Capital required $\left(\text{K}\right)$ = $43,000,000

Equity flotation cost $\left({\text{f}}_{\text{e}}\right)$ = 6%

Debt flotation cost $\left({\text{f}}_{\text{d}}\right)$ = 2%

To compute: True cost of building a new assembly line

Introduction: Weighted average flotation cost is the determination of the proportion of the project to be financed with equity and the proportion to be financed with debt.