(Related to Checkpoint 14.4) (Flotation costs and NPV analysis) The Faraway Movi

Question

(Related to Checkpoint 14.4) (Flotation costs and NPV analysis) The Faraway Moving Company is involved in a major plant expansion that involves the expenditure of $224 million in the coming year. The firm plans on financing the expansion hrough the retention?5146 milion in rm earning an by borrowing the remaining $78 million. In return for helping sell the $78 million in new debt, the firm's investment banker charges a fee of 250 basis points (where one basis point is 0.01 percent). If Faraway decides to adjust for these flotation costs by adding them to the initial outlay, what will the initial outlay for the project be? The flotation cost adjusted initial outlay is S (Round to the nearest dollar.)

Explanation / Answer

You require $78 million in debt. This whole amount is needed for expansion, i.e., this amount should be after paying for all flotation costs.

Flotation costs = 250 basis points or 2.50%

Amount to be raised = Amount required / (1 - Flotation costs) = $78,000,000 / (1 - 2.50%) = $80,000,000

Flotation cost adjusted initial outlay = $224,000,000 + $80,000,000 = $304,000,000

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.