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Category > Management Posted 12 Jan 2018 My Price 5.00

Weinstein Corporation

Calculating the Weighted Average Flotation Cost

The Weinstein Corporation has a target capital structure that is 80 percent equity, 20 percent debt. The flotation costs for equity issues are 20 percent of the amount raised; the flotation costs for debt issues are 6 percent. If Weinstein needs $65 million for a new manufacturing facility, what is the true cost once flotation costs are considered? We first calculate the weighted average flotation cost, fA:

fA=(E/V )×fE+(D/V )×fD

=80% ×.20 +20% ×.06

=17.2%

The weighted average flotation cost is thus 17.2 percent. The project cost is $65 million when we ignore flotation costs. If we include them, then the true cost is $65 million/(1-f

A

) =$65 million/. 828 = $78.5 million, again illustrating that flotation costs can be a considerable expense.

 

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Maurice Tutor
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Status NEW Posted 12 Jan 2018 10:01 PM My Price 5.00

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