Final answer:
The flotation-adjusted cash flow for time zero, given a firm's target capital structure of 60 percent equity and 40 percent debt with respective flotation costs, is calculated by determining the equity and debt portions of the initial cost, calculating the flotation costs for each, and then subtracting these from the initial project cost. The resulting flotation-adjusted cash flow for time zero is $414,648.
Step-by-step explanation:
The question asks for the flotation-adjusted cash flow for time zero for a firm with a 60 percent equity and 40 percent debt capital structure. The flotation costs are 13 percent for equity and 9 percent for debt and the initial project cost is $468,000. To calculate this, multiply the proportion of each type of capital by the total initial cost, and then subtract the flotation costs for each.
The calculation is as follows:
Equity portion: $468,000 × 60% = $280,800
Debt portion: $468,000 × 40% = $187,200
Flotation cost for equity: $280,800 × 13% = $36,504
Flotation cost for debt: $187,200 × 9% = $16,848
Add the flotation costs for equity and debt to get the total flotation cost, then subtract this from the initial project cost to determine the flotation-adjusted cash flow:
Total flotation cost: $36,504 + $16,848 = $53,352
Flotation-adjusted cash flow: $468,000 – $53,352 = $414,648
Therefore, the flotation-adjusted cash flow for time zero is $414,648.