Question

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?

Answer 1

The weighted average flotation cost for Bleakly Enterprises is calculated by multiplying each component's flotation cost by its proportion in the capital structure and summing the results, resulting in 6.875%.

Step-by-step explanation:

To calculate the weighted average flotation cost, we need to multiply the flotation cost of each component of the capital structure by its proportion and then sum these products. Bleakly Enterprises has a capital structure consisting of common stock (45%), preferred stock (5%), and debt (50%). The respective flotation costs are 9.5% for common stock, 7% for preferred stock, and 4.5% for debt. Therefore, we calculate the weighted average flotation cost as follows:

• (45% × 9.5%) + (5% × 7%) + (50% × 4.5%)
• (0.45 × 0.095) + (0.05 × 0.07) + (0.50 × 0.045)
• (0.04275) + (0.0035) + (0.0225)
• 0.04275 + 0.0035 + 0.0225 = 0.06875 or 6.875%

The weighted average flotation cost for Bleakly Enterprises is 6.875%.