A CFO is analyzing the costs of raising $25,000,000. She knows the flotation costs of equity are 8% while the

Question

A CFO is analyzing the costs of raising $25,000,000. She knows the flotation costs of equity are 8% while the floatation costs of debt are 2%. The capital structure of her company is 60% debt and 40% equity. How much more in capital does she need to raise above the $25,000,000 when factoring in the appropriate mix of floatation costs?

Help In Homework · Accepted Answer

Floatation cost of Equity =8% Floatation cost of Debt =2% Debt : Equity in Capital structure =60:40 So Weighted Floataion cost =60%*2%+40%*8%=4.4% Amount of net Capital to be raised =$25,000,000 Noe with weighted floataion cost of 4.4% , the net realization will be =1-4.4% =95.6% of Gross Capital. So Gross Capital to be raised =$25000000/95.6%= $ 26,150,627.62 Net Capital That will be hand = $ 25,000,000.00 So, Additional Amount to be raised over net $25 M= $ 1,150,627.62 Therefore, the CFO needs to raise $1,150,627.62 more than $25,000,000 net capital needed due to floatation cost.

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A CFO is analyzing the costs of raising $25,000,000

Expert Solution

Archived Solution

Floatation cost of Equity =8%
Floatation cost of Debt =2%
Debt : Equity in Capital structure =60:40
So Weighted Floataion cost =60%2%+40%8%=4.4%
Amount of net Capital to be raised =$25,000,000
Noe with weighted floataion cost of 4.4% , the net
realization will be =1-4.4% =95.6% of Gross Capital.
So Gross Capital to be raised =$25000000/95.6%=	$ 26,150,627.62
Net Capital That will be hand =	$ 25,000,000.00
So, Additional Amount to be raised over net $25 M=	$ 1,150,627.62

Therefore, the CFO needs to raise $1,150,627.62 more
than $25,000,000 net capital needed due to floatation cost.