Question

(Flotation costs) Two-Foot Tools, Inc. sells and distributes work footwear and other clothing for people who work under extreme cold conditions such as in the Arctic or Antartica. The company recently borrowed $19 million from a consortium of banks and agreed to pay 9.9 percent interest before considering taxes of 30 percent The banks also charged the firm a fee of 2.3 percent of the issue to make all the arrangements. The firm plans to invest a total of $37 million in a new distribution facility and will finance the remainder using cash from prior years' retained earnings. Given the firm's plans, what should the initial outlay for the plant expansion be if flotation costs are accounted for by adjusting the initial outlay? The initial outlay for the plant expansion must be S 37,447,288 (Round to the nearest dollar.)

Answer 1

Compute the initial outlay for plant expansion, using the equation as shown below:

Initial outlay = Total investment required + Floatation cost on debts

                      = $37,000,000 + ($19,000,000*2.3%)

                      = $37,000,000 + $437,000

                      = $37,437,000

Hence, the initial outlay for plant expansion is $37,437,000.