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.) Initial cash flow $ 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.) Initial cash flow $ 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.) Initial cash flow $

Explanation / Answer

SOLUTION 1. The initial cost of the plant if the company raises all equity externally is:113000000*8.35=94355000 2.The initial cost of the plant if the company typically uses 60 percent retained earnings is: cost debt 60% 2576400 retained earnings 49% 3774200 6350600 3.The initial cost of the plant if the company typically uses 100 percent retained earnings is:113000000*8.35=94355000 Note: The cost of retained earning is same as equity

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