You Are Considering a Project Which Requires $687,000 in External

question 202

Multiple Choice

You are considering a project which requires $687,000 in external financing. The flotation cost of equity is 10 percent and the flotation cost of debt is 6 percent. You wish to maintain a debt-equity
Ratio of .55. What is the initial cost of the project including the flotation costs?

• A) $642,113
• B) $656,008
• C) $711,209
• D) $751,482
• E) $818,406

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Definitions:

Gross Profit Method

An inventory valuation technique estimating the cost of goods sold and the ending inventory, based on the gross profit margin.

LIFO Liquidations

A situation where older inventory, costed at historical prices, is sold, potentially leading to an inflated profit margin due to lower cost of goods sold.

Interim Report

A financial statement covering a period of less than one fiscal year that provides updates on a company's performance and financial position between annual reports.

Operating Results

The outcome of a company's core business operations, indicating profitability or loss over a certain period.