单选题
Cullen Casket Company is considering a project that requires a $175000
cash outlay and is expected to produce cash flows of $65000 per year for the
next four years. Cullen's tax rate is 40 percent and the before-tax cost of debt
is 9 percent. The current share price for Cullen stock is $32 per share and the
expected dividend next year is $1.50 per share. Cullen's expected growth rate is
5 percent. Cullen finances the project with 70 percent newly issued equity and
30 percent debt, and the flotation costs for equity are 4.5 percent. What is the
dollar amount of the flotation costs attributable to the project, and that is
the NPV for the project, assuming that flotation costs are accounted for
correctly?
Dollar amount
of floatation
costs NPV of project
①A. $5513
$30510
②B. $5513
$32872
③C. $7875
$32872
【正确答案】
B
【答案解析】In order to determine the discount rate, we need to calculate the WACC.
After-tax cost of debt =9.0% × (1 -0.40) =5.40%
Cost of equity=( $1.50/ $32.00) +0.05=0.0469+0.05=0.0969, or 9.69%
WACC =0.70 ×9.69% +0.30 ×5.40% =8.40%
Since the project is financed with 70% newly issued equity, the amount of equity capital raised is 0.70 × $175000 = $122500
Flotation costs are 4.5 percent, which equates to a dollar flotation cost of $122500 × 0.045 = $5512.50.