Question

The weights used in the computation of a project's flotation costs should be based on the:...

The weights used in the computation of a project's flotation costs should be based on the:

A. market values of the company's outstanding debt and equity.

B. current book value of the company's debt and equity.

C. company's historical debt-to-equity ratio.

D. the company's target debt-to-equity ratio.

E. project's actual sources of funding.

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Answer #1

The correct answer is option D. the company's target debt-to-equity ratio.

Flotation cost will be incurred on issuance of fresh securities due to fund raising. Bonds will have different flotation cost and equity will have different. Bonds and equities will be raised in the proportion of target capital structure or target debt to equity ratio.

In order to calculate the flotation cost in a project, we will therefore have to use the company's target debt-to-equity ratio.

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