Sheaves Corp. has a debtequity ratio of .9. The company is considering a new pla

Question

Sheaves Corp. has a debtequity ratio of .9. The company is considering a new plant that will cost $113 million to build. When the company issues new equity, it incurs a flotation cost of 8.3 percent. The flotation cost on new debt is 3.8 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, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

What is the initial cost of the plant if the company typically uses 60 percent retained earnings? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

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, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

Sheaves Corp. has a debtequity ratio of .9. The company is considering a new plant that will cost $113 million to build. When the company issues new equity, it incurs a flotation cost of 8.3 percent. The flotation cost on new debt is 3.8 percent.

Explanation / Answer

Ans 1 Initial cost of Plant if co, raise all equity externally (1+.083)*113 122.379 million Ans2 first of all convert debt to equity into debt to capital to calculate weight so, .9/1.9=.4737 therefore equity=1-.4737 0.5263 cost finance from retain earning=113million*60%=67.8million Remaining will be finance with new capital Therefore, 113-67.8=45.2 If that amount is financed at same debt and equity ratio as of old structure then 45.2m*.4737=2 1.41124m is the amount which is to be raise from debt the cost of that is 21.41124*1.038=22.224867M and 45.2 million *.5263=23.78876m will be raised from new equity and its cost shall be 23.78876*1.083=25.763227 Therefore total cost shall be 67.8+22.224867+25.763227 115.788094 M

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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