The faraway moving company is in a major plant of expansion that involves the expenditure of $211 million in the coming year.The firm plans on financing the expansion through retension of $137 in firm earning and borrowing the remaining $84 million.In return for helping sell the $84 in new debt,the firm investment banker charges a fee of 150 basis points (where 1 basis point is 0.01 percent).If faraway decides to adjust for these flotation cost by adding them to the initial outlay, what floatation cost adjusted of initial outlay?
Answer:
We have been provided with the information that,
| Particular | Amount in $ |
| Cost for expansion | 221 |
| Less: | |
| Expansion through retained Earning |
137 |
| Expansion through Debt |
84 |
Here in the sum we have been provided , the firm investment banker charges a fee of 150 basis points (where 1 basis point is 0.01 percent)
| Bases of point | Percentage term |
| 1 | 0.01 |
| 100 | 1% |
| 150 | 1.50% |
For this situation it is 1.5%
Now we will calculate Flotation Cost Adjusted Initial Outlay
Flotation Cost Adjusted Initial Outlay
= Financing Need/(1-Flotation Cost as percent)
=84 / ( 1-0.015)
=84/0.985
=$ 85.279
Flotation Cost Adjusted Initial Outlay
= Retained earnoing + Flotation Cost Adjusted
=137+ 85.279
=222.279
