Machina Corporation Is Financing an Ongoing Construction Project

question 43

Multiple Choice

Machina Corporation is financing an ongoing construction project.The firm needs $8 million of new capital during each of the next three years.The firm has a choice of issuing new debt and equity each year as the funds are needed,or issuing the debt now and the equity later.The firm's capital structure is 40 percent debt and 60 percent equity.Flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds.Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount.Ignoring time value effects due to timing of the cash flows,what is the absolute difference in dollars saved by raising the needed debt all at once in a single issue rather than in three separate issues?

• A) $0
• B) $171,387
• C) $140,809
• D) $156,098
• E) $134,400

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Definitions:

Computer Workstations

Advanced computing systems built for the purpose of executing scientific or technical applications with high efficiency.

Direct Method

A cash flow statement preparation approach that involves directly listing all major operating cash receipts and payments during the period.

Maintenance Costs

refer to expenses incurred to keep machinery, equipment, and facilities in working order, ensuring operational efficiency.

Labor Hours

A measure of the amount of work performed, calculated by multiplying the number of workers by the number of hours each works.