Trower Corp. has a debt–equity ratio of .85. The company is considering a new pl

Question

Trower Corp. has a debt–equity ratio of .85. The company is considering a new plant that will cost $114 million to build. When the company issues new equity, it incurs a flotation cost of 8.4 percent. The flotation cost on new debt is 3.9 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, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

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, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

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, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Trower Corp. has a debt–equity ratio of .85. The company is considering a new plant that will cost $114 million to build. When the company issues new equity, it incurs a flotation cost of 8.4 percent. The flotation cost on new debt is 3.9 percent.

Explanation / Answer

a) When it uses 100% equity externally, there would be flotation cost of 8.4% on new equity

Initial Cash Flow = 114 / (1 - 8.4%) = $124,454,148

b) When it uses 65% retained earnings, there would be flotation cost on only 35%

Initial Cash Flows = 114 / [0.65 x 1 + 0.35 x (1 - 8.4%)] = $117,453,122

c) With 110% retained earnings, initial cash flows = $114,000,000 as there is no flotation cost.

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