Goodbye, Inc., recently issued new securities to finance a new TV show. The proj

Question

Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $14.8 million, and the company paid $805,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.8 percent of the amount raised, whereas the debt issued had a flotation cost of 3.8 percent of the amount raised. If the company issued new securities in the same proportion as its target capital structure, what is the company’s target debt–equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $14.8 million, and the company paid $805,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.8 percent of the amount raised, whereas the debt issued had a flotation cost of 3.8 percent of the amount raised. If the company issued new securities in the same proportion as its target capital structure, what is the company’s target debt–equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Explanation / Answer

The project cost is $14.8 million

Total Flotation cost is $805,000

Capital structure (debt) = ($14.8million * 59/100) = $8.732 million

Capital structure (equity) = ($14.8 million * 41/100) = $6.068 million

Flotation cost = ($8.732million * 3.8%) + ($6.068 million * 7.8%)

= $331,816 + $473,304

= $805,120

Therefore, the weight of debt is 59% and equity 41%.

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