Question

Assume the firm’s debt−equity ratio is 200%. The project under consideration needs $600,000 initial cost. The...

Assume the firm’s debt−equity ratio is 200%. The project under consideration needs $600,000 initial cost. The firm can raise the fund by issuing common stock and debt. The cost of equity is 21%. The company can raise new debt at the cost of 9%. The flotation cost rate associated with equity is 9%, and the flotation cost rate associated with debt is 3%. This project will generate constant after-tax cash flows of $318,000 per year forever. Assume the tax rate is 40%. What is the net present value of the project if the flotation cost is considered?

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