Question

Western Wear is considering a project that requires an initial investment of $602,000. The firm maintains a debt-equity ratio of .55 and has a flotation cost of debt of 4.9 percent and a flotation cost of equity of 10.2 percent. The firm has sufficient internally generated equity to cover the equity portion of this project. What is the initial cost of the project including the flotation costs

Answer 1

Answer:

Initial cost  $612,652

Please find the detailed answer as follows:

Explanation:

The calculations are made considering the following formulas

Average flotation cost = (1/1.55) (0) + (0.55/1.55) (0.049) = 0.01739

Initial cost = $602,000/(1 - 0.01739) = $612,652