Question

KCE Co. is operating at its target capital structure with market values of $110 million in equity and $175 million in debt outstanding. KCE plans to finance a new $32 million project using the same relative weights of debt and equity. Ignoring flotation costs, how much new debt must be issued to fund the project?

Answer 1

$19.64 million

Step-by-step explanation:

The computation of new debt is shown below:

= (Market value of debt outstanding ÷ Total market value) × new finance amount

= ($175 million ÷ $285 million) × $32 million

= $19.64 million

The Total market value is computed below:

= Market value of equity + Market value of debt outstanding

= $110 million + $175 million

= $285 million