value 1.00 points Problem 14-21 Flotation Costs [L04] Pardon Me, Inc., recently

Question

value 1.00 points Problem 14-21 Flotation Costs [L04] Pardon Me, Inc., recently issued new securities to finance a new TV show. The project cost $14.7 million, and the company paid $795,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.7 percent of the amount raised, whereas the debt issued had a flotation cost of 3.7 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.) Debt-equity ratio

Explanation / Answer

Let X is debt and Y is equity.

X*(1-7.70%)+Y*(1-3.70%) = $14,700,000

X+Y = $14,700,000+$795,000 = $15,495,000

X = $15,495,000-Y

Take X*(1-7.70%)+Y*(1-3.70%) = $14,700,000

($15,495,000-Y ) *(1-7.70%)+Y*(1-3.70%) = $14,700,000

$14,301,885 -0.923*Y+Y-Y*0.037 = $14,700,000

0.04*Y = $398,115

Equity, Y = $9,952,875

Debt, X = $5,542,125

Debt equity ratio:

= Debt/Equity

= $5,542,125/$9,952,875

= 0.5568

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