Bleakly Enterprises has a capital structure of 45 percent common stock, 5 percent preferred stock, and 50 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax rate is 34 percent. What is the weighted average flotation cost?5.83 percent6.20 percent6.42 percent6.67 percent6.88 percent

Question

Kayleigh Lin

Business

27 January, 23:44

Bleakly Enterprises has a capital structure of 45 percent common stock, 5 percent preferred stock, and 50 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax rate is 34 percent. What is the weighted average flotation cost?5.83 percent6.20 percent6.42 percent6.67 percent6.88 percent

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Desiree Hester · Answer 1

6.88 percent

Explanation:

The computation of the weighted average flotation cost is shown below:

= (Weightage of debt) * (flotation cost of debt) + (Weightage of preferred stock) * (cost of preferred stock) + (Weightage of common stock) * (cost of common stock)

= (50% * 4.5%) + (5% * 7%) + (45% * 9.5%)

= 2.25% + 0.35% + 4.275%

= 6.88%

Simply we multiply the cost of each capital structure with its weighatge so that the accurate average can come