Question: Travis & Sons has a target capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The

Travis & Sons has a target capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The flotation costs of the new bonds would be 3 percent of the amount raised. The flotation costs of the new preferred stock issues would be 5 percent. The flotation costs of the new common stock issues would be 8 percent. The company's tax rate is 39 percent. The company is considering a project that is equally as risky as the overall firm. This project needs to invest $325,000 in manufacturing equipment. This equipment will be depreciated straight-line to zero over the projects four-year expected life. In four years, the equipment will be worth nothing. The project will generate operating cash flows of $87,000, $279,000, $116,000, $59,000 over the next four years, respectively. The firm will issue new securities in the same proportion as its target capital structure to finance this project.

What is the weighted average flotation percentage?

(Choose the correct answer)

6.48%

5.32%

4.27%

4.96%

5.85%

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