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Calculating Flotation costs Suppose your company needs \(\$ 6\) million to build a new assembly line. Your target debt-equity ratio is \(1.0 .\) The flotation cost for new equity is 15 percent, but the flotation cost for debt is only 4 percent. Your boss has decided to fund the project by borrowing money, because the flotation costs are lower and the needed funds are relatively small. a. What do you think about the rationale behind borrowing the entire amount? b. What is your company's weighted average flotation cost? c. What is the true cost of building the new assembly line after taking flotation costs into account? Does it matter in this case that the entire amount is being raised from debt?

Calculating Flotation costs Western Alliance Company needs to raise \(\$ 12\) million to start a new project and will raise the money by selling new bonds. The company has a target capital structure of 60 percent common stock, 10 percent preferred stock, and 30 percent debt. Flotation costs for issuing new common stock are 12 percent, for new preferred stock, 6 percent, and for new debt, 4 percent. What is the true initial cost figure Western should use when evaluating its project?

Flotation costs and NPV Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of \(1.2 .\) It's considering building a new \(\$ 40\) million manufacturing facility. This new plant is expected to generate aftertax cash flows of \(\$ 5.5\) million in perpetuity. There are three financing options: 1\. A new issue of common stock. The flotation costs of the new common stock would be 8 percent of the amount raised. The required return on the company's new equity is 18 percent. 2\. A new issue of 20 -year bonds. The flotation costs of the new bonds would be 3 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 9 percent, they will sell at par. 3\. Increased use of accounts payable financing. Because this financing is part of the company's ongoing daily business, it has no flotation costs and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .25 . (Assume there is no difference between the pretax and aftertax accounts payable cost.)

Project Evaluation This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for \(\$ 6\) million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for \(\$ 9.2\) million. The company wants to build its new manufacturing plant on this land; the plant will cost \(\$ 14\) million to build. The following market data on DEI's securitics are current: DEI uses G. M. Wharton as its lead underwriter. Wharton charges DEI spreads of 9 percent on new common stock issues, 7 percent on new preferred stock issues,