contestada

Cal Poly Corporation would like to start a new project: building a high-tech rose float for the next regional contest. This rose float project will require $35,000 in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds and new stocks. It has a target capital structure of 60 percent common stock, and 40 percent debt. Flotation costs for issuing new common stock is 7%, and for new debt it is 4%.
(a) The true required initial investment that Cal Poly Corporation should use in its valuation of the rose is:_____.
1. $36,920.
2. $36,820.
3. $35,000.
4. $33,180.
(b) The lower the flotation costs, the lower the initial investment that needs to be used in project valuation, and so the lower the project's Net Present Value. This statement is____.
1. True
2. False

Respuesta :

Answer and Explanation:

The computation is shown below;

a.

Given that

Weight of Equity = 0.4

Weight of Debt = 0.6

The Flotation cost of Capital = Weight of Equity × Flotation cost of Equity + Weight of Debt × Flotation cost of Debt

= 7 × 0.4 + 4 × 0.6

= 5.2

Now  

True cost is

= initial investment ÷ (1 - flotation cost %)

=  $35,000 ÷ (1 - 0.052)

= $36,920

b

In the case when there is a less flotation cost so it would decreased the initial investment due to this there would be an increase in net present value

hence, the given statement is false  

Otras preguntas