Lorre, Inc., recently issued new securities to finance a new TV show. The projec

Question

Lorre, Inc., recently issued new securities to finance a new TV show. The project cost $13.1 million, and the company paid $635,000 in flotation costs. In addition, the equity issued had a flotation cost of 6.1 percent of the amount raised, whereas the debt issued had a flotation cost of 2.1 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 final answer to 4 decimal places. (e.g., 32.1616))

Explanation / Answer

Flotation cost = equity flotation cost*equity raised+debt flotation cost*(project cost-equity raised)

635000=0.061*equity raised+0.021*(13100000-equity raised)

equity raised = 8997500

D/E = project cost-equity raised/equity raised

=(13100000-8997500)/8997500

=

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