Trower Corp. has a debt-equity ratio of 0.85. The company is considering a new p

Question

Trower Corp. has a debt-equity ratio of 0.85. The company is considering a new plant that will cost $111 million to build. When the company issues new equity, it incurs a flotation cost of 8.1 percent. The flotation cost on new debt is 3.6 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, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

What is the initial cost of the plant if the company typically uses 65 percent retained earnings? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

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, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

What is the initial cost of the plant if the company typically uses 65 percent retained earnings? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

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, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

Explanation / Answer

Trower Corp. has a debt-equity ratio of 0.85. The company is considering a new plant that will cost $111 million to build. When the company issues new equity, it incurs a flotation cost of 8.1 percent. The flotation cost on new debt is 3.6 percent.

New plant will be raised through debt = 111 *0.85/(1+0.85) = 51

New plant will be raised through equity = 111 *1/(1+0.85) = 60

What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

Initial cost of the plant if the company raises all equity externally = Debt to be raised/(1-floatation Cost) + Equity to be raised/(1-flotation cost)

Initial cost of the plant if the company raises all equity externally = 51000000/(1-3.6%) + 60000000/(1-8.1%)

Initial cost of the plant if the company raises all equity externally = 118,192,921

What is the initial cost of the plant if the company typically uses 65 percent retained earnings? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

Initial cost of the plant if the company typically uses 65 percent retained earnings = Retained Earning + New Equity to be raised/(1-floatation Cost) + Debt to be raised/(1-flotation cost)

Initial cost of the plant if the company typically uses 65 percent retained earnings = 60000000*65% + 60000000*35%/(1-8.1%) + 51000000/(1-3.6%)

Initial cost of the plant if the company typically uses 65 percent retained earnings = 114,755,489

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, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

Initial cost of the plant if the company typically uses 100 percent retained earnings = Retained Earning + Debt to be raised/(1-flotation cost)

Initial cost of the plant if the company typically uses 100 percent retained earnings = 60000000*100% + 51000000/(1-3.6%)

Initial cost of the plant if the company typically uses 100 percent retained earnings = 112,904,564

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