Suppose your company needs $15 million to build a new assembly line. Your target debt-equity ratio is
Question:
Suppose your company needs $15 million to build a new assembly line. Your target debt-equity ratio is 90. The flotation cost for new equity is 8 percent, but the flotation cost for debt is only 5 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.
a. What do you think about the rationale behind borrowing the entire amount?
b. What is your company’s weighted average flotation cost, assuming all equity is raised externally?
c. What is the true cost of building the new assembly line after taking flotation costs into account? Does it matter in this case that the entire amount is being raised from debt?
Step by Step Answer:
a He should look at the weighted average flotation cos...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th Edition
Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan
Students also viewed these Corporate Finance questions
-
Suppose your company needs $43 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2...
-
What do you think about Game Trucks basic concept?
-
To the extent it occurs, what do you think about the practice of not hiring unemployed persons? Is it lawful? A sensible human resource practice?
-
Concentric with the circle x 2 + y 2 + 2x 8y + 8 = 0 and passes through (2, 3)
-
A dolphin jumps with an initial velocity of 12.0 m/s at an angle of 40.0 above the horizontal. The dolphin passes through the center of a hoop before returning to the water. If the dolphin is moving...
-
USA Corporation hired Jesse to install a computer system for the company and paid him $8,000 for the work. USA soon realized that there were problems with the system and asked Jesse to refund the...
-
Choose letter \(\mathrm{C}\) (for committed fixed cost) or \(\mathrm{D}\) (for discretionary fixed cost) to indicate the type of each of the following described costs. a. Professional meeting...
-
The quality control manager at a compact fluorescent light bulb (CFL) factory needs to determine whether the mean life of a large shipment of CFLs is equal to 7,500 hours. The population standard...
-
Assume that you are the project manager and have been requested by top management in your organization to carry out a problem analysis in order to develop a problem tree and objective tree so as to...
-
Banko Inc. manufactures sporting goods. The following information applies to a machine purchased on January 1, Year 1: $ 78,500 $ 2,000 $ 1,000 5 years 159,000 $ 2,000 Purchase price Delivery cost...
-
SML and WACC an all equity firm is considering the following projects: The T-bill rate is 5 percent, and the expected return on the market is 12 percent. a. Which projects have a higher expected...
-
Calculating Flotation Costs Southern Alliance Company needs to raise $30 million to start a new project and will raise the money by selling new bonds. The company has a target capital structure of 60...
-
Multiple Choice Questions Identify the best answer to each question. 1. A city levies property taxes of $500,000 for its General Fund for a year and expects to collect all except the estimated...
-
Calculate the moment of inertia of a disk and ring. Given: Mass of disk = 114 gram, Radius of Disk = 3.3 cm, Mass of Ring = 467 gram, Inner Radius of Ring = 4 cm, outer radius of Ring = Inner radius...
-
An effusive molecular beam source produces a beam of molecules with a Maxwell- Boltzmann speed distribution. Such a source may be realized by placing a small pinhole at the end of a tube and using a...
-
Zachary Corporation paid one of its sales representatives $8,500 during the month of March. The rep is paid a base salary plus $14 per unit of product sold. During March, the rep sold 170 units....
-
Fig. P8.1 10 ft D IP 8.1 A W10 x 39 rolled-steel beam supports a load P as shown. Knowing that P = 45 kips, a = 10 in., and 6 = 18 ksi, determine (a) the maximum value of the normal stress 6, in the...
-
Key comparative figures for Apple and Google follow. $ millions Net sales Cost of sales 161,782 163,756 Apple Google Current Year Prior Year Current Year Prior Year $ 260,174 $ 265,595 $ 161,857 $...
-
True or False: The rotor can be turning very slowly in sleeve bearings for an accurate motor end bracket impact analysis.
-
Create a data model for one of the processes in the end-of-chapter Exercises for Chapter 4. Explain how you would balance the data model and process model.
-
You are riding in a train, gazing into the distance through its window. As close objects streak by, you notice that the nearby fluorescent lights make dashed streaks. Explain.
-
Your firm will have a fixed interest expense for the next 10 years. You recently found out that the marginal income tax rate for the firm will change from 30 percent to 40 percent next year. Describe...
-
Describe why it is not usually appropriate to use the coupon rate on a firms bonds to estimate the pretax cost of debt for the firm.
-
Maltese Falcone, Inc., has not checked its weighted average cost of capital for four years. Firm management claims that since Maltese has not had to raise capital for new projects in four years, they...
-
Assume that you start with a balance of $3700 on your credit card. During the first month, you charge $600, and during the second month, you charge $750. Assume that your credit card charges a 27%...
-
Metallica Bearings, Incorporated, is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The...
-
Problem 13-2 (Algo) A metal fabricator produces connecting rods with an outer diameter that has a 1 0.01 inch specification. A machine operator takes several sample measurements over time and...
Study smarter with the SolutionInn App