Question

Suppose ALK Co. needs $13.8 million to build a new assembly line. The target debt-equity ratio is .48. The flotation cost for new equity is 9.6 percent, but the floatation cost for debt is only 5.1 percent. What is the true cost of building the new assembly line after taking flotation costs into account

Answer 1

Answer:

The true cost of building the new assembly line after taking flotation costs into account is $15,022,949

Explanation:

In order to calculate the true cost of building the new assembly line after taking flotation costs into account we would have to calculate first the Weighted average flotation cost for debt and equity  as follows:

Weighted average flotation cost for debt and equity  = 0.051*(0.48/1.48) + 0.096*(1/1.48)

= 0.0814054 or 8.14054%

Therefore, Cost of building the new assembly line including flotation costs  =13,800,000/(1-0.0814054)

=$15,022,949

The true cost of building the new assembly line after taking flotation costs into account is $15,022,949