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Homework answers / question archive / Mayweather Corp
Mayweather Corp. has a debt-equity ration of 0.75. the firm is considering a new plant that will cost $48 million to build. When the company issues new equity, it incurs a floatation cost of 8%. The floatation cost on new debt is 3.5%.
What will be the initial cost of the plant if all equity is raised internally?
a) $53,650,000
b) $51,101,884
c) $73,600,997
d) $48,730,964
Computation of the initial cost of the plant:-
Debt-to-equity ratio = 0.75
Weight of debt = 0.75 / (1+0.75)
= 0.43
Weight of equity = 1 - Debt
= 1 - 0.43
Weighted average flotation cost = (Weight of debt * Flotation cost of debt) + (Weight of equity * Flotation cost of equity)
= (0.43 * 3.5%) + (0.57 * 8%)
= 1.50% + 4.57%
= 6.07%
Initial cost of plant = Cost of plant / (1 - Weighted average flotation cost)
= $48,000,000 / (1 - 6.07%)
= $51,101,884.38 Or $51,101,884
