The MFC Corporation Has Decided to Build a New Facility

question 54

Multiple Choice

The MFC Corporation has decided to build a new facility. The cost of the facility is estimated to be $9.7 million. MFC wishes to finance this project using its traditional debt-to- equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total floatation cost of raising funds?

• A) $300,000
• B) $100,000
• C) $600,000
• D) None of the above

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Definitions:

Constant Returns

A situation in which the rate of increase in output is directly proportional to the increase in inputs in the production process.

Scale

The size or level of operation, indicating the scope or extent of something, often used in discussions of production or economic activities.

Production Function

An economic model that describes how output is created by varying inputs of production like labor and capital.

Technological Knowledge

Society’s understanding of the best ways to produce goods and services.