A. Jungle Joe’s has a debt-equity ratio of 1.40. The firm has a flotation cost o
ID: 2809124 • Letter: A
Question
A.
Jungle Joe’s has a debt-equity ratio of 1.40. The firm has a flotation cost of debt of 8.1 percent and a flotation cost for equity of 12.88 percent. How much does the firm need to borrow to fully fund a project that has an initial cost of $71.5 million?
$79.525 million
$77.271 million
$82.220 million
$81.473 million
B.
Jensen Shipping is considering a project that has an initial cost of $224,000. The project will produce aftertax cash flows of $46,000 a year forever. The firm’s WACC is 15.2 percent and its tax rate is 36 percent. Equity has a flotation cost of 12.0 percent while the flotation cost for debt is 5.5 percent. What is the net present value of this project, including the flotation costs, if the firm’s debt-equity ratio is .3? (Rounded)
$46,949
$52,352
$31,536
$37,536
Jungle Joe’s has a debt-equity ratio of 1.40. The firm has a flotation cost of debt of 8.1 percent and a flotation cost for equity of 12.88 percent. How much does the firm need to borrow to fully fund a project that has an initial cost of $71.5 million?
Explanation / Answer
a. Needs Funds = Debt Share + Equity Share
$71.5 Million = (X * 1.4/2.4 * (1 - 0.081) + (X * 1/2.4 * (1 - 0.1288)
$71.5 Million = X * (0.5361 + 0.363)
X = $71.5 / 0.8991
Funds Needs to be raised = $79.525 Million Option A
B. Total Floatation Cost = Debt Floatation Cost + Equity Floatation Cost
Total Floatation Cost = 0.3/1.3 * 0.055 + 1.0/1.3 * 0.12
Total Floatation Cost = 10.50%
Initial Cost including Floatation Cost = 224000 / (1-0.105) = $250279.33
NPV = ($46000 / 0.152) - 250279.33
NPV = $52352 Option B
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