Trower Corp. has a debt?equity ratio of .85. The company is considering a new pl
ID: 2655957 • Letter: T
Question
Trower Corp. has a debt?equity ratio of .85. The company is considering a new plant that will cost $120 million to build. When the company issues new equity, it incurs a flotation cost of 9 percent. The flotation cost on new debt is 4.5 percent.
What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to the nearest whole dollar, e.g., 1,234,567.)
Initial cash outflow $
What is the initial cost of the plant if the company typically uses 65 percent retained earnings? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to the nearest whole dollar, e.g., 1,234,567.)
Initial cash outflow $
What is the initial cost of the plant if the company typically uses 100 percent retained earnings? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to the nearest whole dollar, e.g., 1,234,567.)
Initial cash outflow $
Explanation / Answer
a.D/E = 0.85
D = 0.85 E
E =1, D=0.85
Total Debt = 0.85/1.85*120,000,000
Total equity = 1/1.85*120,000,000
Initial cash outflow for the cost of plant = 0.85/1.85*120,000,000 *1.045 +1/1.85*120,000,000*1.09 =$128,318,919
b. If the company uses 65% of equity requirement from retianed earnings
Initial cash outflow for the cost of plant = 0.85/1.85*120,000,000 *1.045 +1/1.85*120,000,000*0.65*1 + 1/1.85*120,000,000*0.35*1.09 =$124,524,324
c. If the company uses 100% of equity requirement from retianed earnings
Initial cash outflow for the cost of plant = 0.85/1.85*120,000,000 *1.045 +1/1.85*120,000,000*1 =$122,481,081
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