The Sprite Toy Company needs to raise funds for a major expansion of its manufac

Question

The Sprite Toy Company needs to raise funds for a major expansion of its manufacturing operations. Sprite has determined that it will issue $100 million of financing, but it has not decided whether to issue debt or equity. The company is publicly traded.
a. based on the information given in Table 3-2, compute the flotation costs that Sprite would incur it is raises the needed funds by issuing equity only.
b. Based on the information given, compute the Flotation costs that Sprite would incur if it raises the needed funds by issuing straight debt only.
c. if Sprite wants to keep its flotation costs low, which form of financing should it sue? Dsicuss some factors other than flotation costs that the company should consider?

Table 3-2 Bonds equity
Issue Size ($ millions) straight convertible seasoned issues IPOs Under 10.0 4.4% 8.8% 13.3% 17% 10.0-19.9 2.8 8.7 8.7 11.6 20.0-39.9 2.4 6.1 6.9 9.7 40.0-59.9 2.3 4.3 5.9 8.7 60.0-79.9 2.3 3.2 5.2 8.2 80.0-99.9 2.2 3.0 4.7 7.9 100.0-199.9 2.3 2.8 4.2 7.1 200.0-499.9 2.2 2.2 3.5 6.5 500.0-and larger 1.6 2.1 3.2 5.7

Explanation / Answer

Capital Reqd $100M a. For Seasoned equity, Floatayion cost is 4.2% of Capital raised. So 4.2%*$100M = $4.2M b. For Staright Debt, Floatation cost is 2.3% of Capital Raised So 2.3%*$100M = $2.3M c. For Low Floataion cost. Straight Debt should be used. Othere factors are 1. Prevailing Interest rates 2. Current Money Supply

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