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

Amount Raised $14,800,000 Flotation Cost $805,000 Total Cost $15,605,000 Percentage of flotation cost to total cost = $805,000/$14,800,000 5.16% 5.10% weighted average flotation cost 5.16% 5.10% Equity Flotation cost 7.80% 7.60% Debt Flotation Cost 3.80% 3.60% The equation to calculate the percentage flotation costs is: Flotation cost= 0.0516 = 0.078(E/V) + 0.038(D/V) Solve this equation to find the debt-equity ratio as follows: 0.0516(V/E) = 0.078 + 0.038(D/E) V/E = (1 + D/E) 0.0516(D/E + 1) = 0.078 + 0.038(D/E) 0.0516(D/E ) + 0.0516) = 0.078 + 0.038(D/E) Debt Equity Ratio (D/E) 1.94

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