Finance Its Ongoing Construction Project, Bowen-Roth Incwill Need $5,000,000 of New

question 17

Multiple Choice

finance its ongoing construction project, Bowen-Roth Incwill need $5,000,000 of new capital during each of the next 3 years The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later Its target capital structure is 40% debt and 60% equity, and it wants to be at that structure in 3 years, when the project has been completed Debt flotation costs for a single debt issue would be 1.6% of the gross debt proceeds Yearly flotation costs for 3 separate issues of debt would be 3.0% of the gross amount Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in 3 separate issues?

• A) $79,425
• B) $83,606
• C) $88,006
• D) $92,406
• E) $97,027

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Definitions:

Available-For-Sale Securities

Financial assets that are purchased with the intention of selling before their maturity date, not held for long-term investment.

Trading Debt Securities

The act of buying and selling debt instruments, such as bonds, in the financial markets as a means of investment or speculation.

Fair Value Adjustment

An accounting process to adjust the book value of an asset or liability to its fair value.

Unrealized Gain

The unrealized gain from an investment that hasn't been converted into cash.