Question

Your company needs to raise $1,250,000. The cost to raise equity is 5% while the cost...

Your company needs to raise $1,250,000. The cost to raise equity is 5% while the cost to raise debt is 2%. You know your capital structure is 25% debt and 75% equity. Your WACC is 9%. How much money do you actually need to raise once you factor in flotation costs?

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Answer #1

Weight of Debt = 25%
Flotation Cost of Debt = 2%
Weight of Equity = 75%
Flotation Cost of Equity = 5%

Weighted Average Flotation Cost = Weight of Debt * Flotation Cost of Debt + Weight of Equity * Flotation Cost of Equity
Weighted Average Flotation Cost = 25% * 2% + 75% * 5%
Weighted Average Flotation Cost = 4.25%

Amount Actual Raised * (1 - Weighted Average Flotation Cost) = Amount Needed to Raise
Amount Actual Raised * (1 - 0.0425) = $1,250,000
Amount Actual Raised * 0.9575 = $1,250,000
Amount Actual Raised = $1,305,483

Therefore, you need to actually raise $1,305,483 once you factor in flotation costs.

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