The MFC Corporation Has Decided to Build a New Facility

question 60

Multiple Choice

The MFC Corporation has decided to build a new facility. It estimates the cost of the facility at $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 percent, and the issue cost of debt is 1 percent. What is the total flotation cost of raising funds?

• A)$300,000
• B)$100,000
• C)$600,000
• D)$970,000

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Definitions:

Marginal Social Cost

The additional cost incurred by society as a whole due to the production of one extra unit of a good or service.

Socially Optimal

A state or outcome in which the total benefits to society are maximized, taking into account all costs and benefits, both private and external.

Artificially Scarce Good

A good that is made scarce through artificial means such as through intellectual property rights or monopoly pricing, despite its capacity for abundant supply.

External Cost

An uncompensated cost that an individual or firm imposes on others; also known as negative externality.