Bay Corp. has a debt-equity ratio of 0.25 (=1/4). The company is considering a new plant...

  

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Bay Corp. has a debt-equity ratio of 0.25 (=1/4). The company is considering a new plant that will cost $800 million to build. When the company issues new equity, it incurs a flotation cost of 9 percent. The flotation cost on new debt is 2 percent. a. What is the initial cost of the plant if the company raises all equity externally (and funds the project with the company's debt-equity ratio)? Note: The debt and equity ratios, (B/V) and (S/V), can be calculated as follows: With (B/S) = 0.25, (S/S)+(B/S) =(V/S) 1.25. Therefore (S/V)=1/1.25 .8 and (B/V)-1-(S/V)=.2. b. What is the initial cost of the plant if the company raises 50 percent of the new equity required using retained earnings (and funds the project with the company's debt-equity ratio)? Bay Corp. has a debt-equity ratio of 0.25 (=1/4). The company is considering a new plant that will cost $800 million to build. When the company issues new equity, it incurs a flotation cost of 9 percent. The flotation cost on new debt is 2 percent. a. What is the initial cost of the plant if the company raises all equity externally (and funds the project with the company's debt-equity ratio)? Note: The debt and equity ratios, (B/V) and (S/V), can be calculated as follows: With (B/S) = 0.25, (S/S)+(B/S) =(V/S) 1.25. Therefore (S/V)=1/1.25 .8 and (B/V)-1-(S/V)=.2. b. What is the initial cost of the plant if the company raises 50 percent of the new equity required using retained earnings (and funds the project with the company's debt-equity ratio)?

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