What are the formulae involving the calculation of flotation cost?
Your company is considering a project that will cost $1
million.The project will generate after-tax cash flows of $250,000
per year for 7 years. The WACC is 15% and the firm's target D/E
ratio is .6 The flotation cost for equity is 5% and the flotation
cost for debt is 3%. What is the NPV for the project after
adjusting for flotation costs?
fA = (E/V) x fE + (D/V) x fD
fA = (.375)(3%) + (.625)(5%) = 4.25%
PV of future cash flows = 1,040,105
NPV = 1,040,105 -1,000,000/(1-.0425) = -4,281