Question

Bleakly Enterprises has a capital structure of 45 percent common stock, 5 percent preferred stock, and 50 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax rate is 34 percent. What is the weighted average flotation cost?5.83 percent6.20 percent6.42 percent6.67 percent6.88 percent

Answer 1

Answer:

6.88 percent

Explanation:

The computation of the weighted average flotation cost is shown below:

= (Weightage of debt) × (flotation cost of debt)  + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of  common stock) × (cost of common stock)

= (50% × 4.5%) + (5% × 7%) + (45% ×9.5%)

= 2.25% + 0.35% + 4.275%

= 6.88%

Simply we multiply the cost of each capital structure with its weighatge so that the accurate average can come