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 $14.5 million, and the company paid $775,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.5 percent of the amount raised, whereas the debt issued had a flotation cost of 3.5 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 $14.5 million, and the company paid $775,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.5 percent of the amount raised, whereas the debt issued had a flotation cost of 3.5 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

Total flotation cost = 775000 / 14500,000 * 100 = 5.34482759

Let X = weight of DEBT and ( 1 - X) will be EQUITY

3.5(X) + 7.5 (1 - X) = 5.34482759

4X = 2.15517241

X = 0.5387931025

Equity = 1 - X = 0.4612068975

Debt - equity ratio = X / ( 1 -X) = 0.5387931025 / 0.4612068975 = 1.1682...............Final answer

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