Suppose your company needs $43 million to build a new assembly line. Your target debt-equity ratio is .65. The flotation cost for new equity is 6 percent and the flotation cost for debt is 2 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What do you think about the rationale behind borrowing the entire amount?

See explanation

Explanation:

Debt = 0.65

Weight = 39.39%

Cost for debt = 2%

Product = 39.39% × 2%

= 0.3939 × 0.02

= 0.007878

Equity = 1.00

Weight = 60.61%

Cost for equity = 6%

Product = 60.61% × 6%

= 0.6061 × 0.06

= 0.036366

Weighted average floatation cost:

= 0.007878 + 0.036366

= 0.044244

= 4.42%

The true cost of the building will then be:

= Funds needed / (1 - Floatation cost)

= $43,000,000 / (1 - 0.044244)

= $43,000,000 / 0.955756

= $44,990,562

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a manufacturer of printed circuit boards uses exponential smoothing with trend to forecast monthly demand of its product. at the end of december, the company wishes to forecast sales for january. the estimate of trend through november has been 200 additional boards sold per month. average sales have been around 1000 units per month. the demand for december was 1100 units. the company uses α = 0.20 and β = 0.10. make a forecast including trend for the month of january.