The Faraway Moving Company is involved in a major plant expansion that involves

Question

The Faraway Moving Company is involved in a major plant expansion that involves the expenditure of $221 million in the coming year. The firm plans on financing the expansion through the retention of $137 million in firm earnings and by borrowing the remaining $84 million. In return for helping sell the $84 million in new debt, the firm's investment banker charges a fee of 150 basis points (where one basis point is 0.01 percent). If Faraway decides to adjust for these flotation costs by adding them to the initial outlay, what will the initial outlay for the project be? The flotation cost adjusted initial outlay is $Q. (Round to the nearest dollar.)

Explanation / Answer

Answer : $ 222.279

Working notes for the above answer is as under

We have been provided with the information that,

Particular

Amount in $

Cost for expansion

221

Less:

Expansion through
retained Earning

137

Expansion through
Debt

84

Here in the sum we have been provided , the firm investment banker charges a fee of 150 basis points (where 1 basis point is 0.01 percent)

Bases of point

Percentage term

1

0.01

100

1%

150

1.50%

For this situation it is 1.5%

Now we will calculate Flotation Cost Adjusted Initial Outlay

Flotation Cost Adjusted Initial Outlay

= Financing Need/(1-Flotation Cost as percent)

=84 / ( 1-0.015)

=84/0.985

=$ 85.279

Flotation Cost Adjusted Initial Outlay

= Retained earnoing + Flotation Cost Adjusted

=137+ 85.279

=222.279

Particular

Amount in $

Cost for expansion

221

Less:

Expansion through
retained Earning

137

Expansion through
Debt

84

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.