Flotation Cost-Excel Sign In HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW 3
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Question
Flotation Cost-Excel Sign In HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW 3 M B 1 u . I·16-A-1 Alignment Number | Conditional Format astCel Styles . as Cel Cells Editing dells formatting. Table- A firm is considering a project that will generate perpetual after-tax cash flows of $24,500 per year beginning next year. The project has the same risk as the firm's overall operations and must be financed externally. Equity flotation costs 12 percent and debt issues cost 3 percent on an after-tax basis. The firm's D/E ratio is 05. What is the most the firm can pay for the project and still earn its required return? Perpetual after-tax yearly cash flows Equity flotation cost Debt flotation cost Firm DIE ratio 24,500 12.00% 3.00% 10 13 14 omplete the following analysis. Do not hard code values in your calculations do not round intermediate calculations, and round your answer to the nearest Ask me anything ulo e m @oo 5 6 7 8 9Explanation / Answer
WACC = Cost of debt * Weight of debt + Cost of equity * Weight of equity
Debt / Equity = 0.50
0.50 Equity = Debt
Debt = 1 - Equity
0.50 Equity = 1-Equity
1.50 Equity = 1
Equity = 1/1.50 i.e 0.67
Debt = 1-0.67 i..e 0.33
WACC = 0.67*12%+0.33*3% i.e 9.03
Value = After tax cash flows/ WACC
= 24500/9.03% i.e 271317.829
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