he R-Bar-M Ranch in Montana would like a new mechanized barn, which will require
a $600,000 initial cash outlay. The barn is expected to provide after-tax annual cash savings of $90,000 indefinitely (for practical purposes of computation, forever). The ranch,
which is incorporated and has a public market for its stock, has a weighted average cost
of capital of 14.5 percent. For this project, Mark O. Witz, the president, intends to provide $200,000 from a new debt issue and another $200,000 from a new issue of common
stock. The balance of the financing would be provided internally by
The
of the total debt raised, whereas flotation costs on the new common stock issue come to
15 percent of the issue. What is the
flotation costs? Should the ranch invest in the new barn?
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