You are the manager of The Upper Tier, a company that has a target debt-equity ratio of .45. The company is considering a project with an initial investment of $1,000,000. The present value of the future cash flows of the project is $1,050,000. The cost of floating equity is 9.5% and the flotation cost of debt is 6.6%.
The average weighted flotation cost is 8.6%.
The firm must raise $1,094,113.45 to invest in the project.
Will you invest in the company if a) there were no flotation costs or b) there were flotation costs, and why/why not?