Deep Hollow Markets has a target capital structure of 35 percent debt, 5 percent preferred stock, and 60 percent common stock. The flotation costs are 8.6 percent for common stock, 6.2 percent for preferred stock, and 3.8 percent for debt. The corporate tax rate is 21 percent. What is the weighted average flotation cost?

Question

Lilah Vega

Business

26 October, 20:30

Deep Hollow Markets has a target capital structure of 35 percent debt, 5 percent preferred stock, and 60 percent common stock. The flotation costs are 8.6 percent for common stock, 6.2 percent for preferred stock, and 3.8 percent for debt. The corporate tax rate is 21 percent. What is the weighted average flotation cost?

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Answers (1)

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Zain Cruz · Answer 1

Weighted average flotation cost

= 8.6 (0.6) + 6.2 (0.05) + 3.8 (0.35)

= 5.16 + 0.31 + 1.33

= 6.8%

Explanation:

Weighted average flotation cost is the aggregate of flotation cost of each stock and proportion of each stock in the capital structure.