Europa Corporation Is Financing an Ongoing Construction Project

question 32

Multiple Choice

Europa Corporation is financing an ongoing construction project.The firm will 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 issuing 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 three 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 three separate issues?

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

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Definitions:

Capitalism

An economic system where private ownership and free markets govern trade and production with the primary goal of profit.

Business Enterprises

Business Enterprises refer to organizations engaged in commercial, industrial, or professional activities.

Elite Theory

posits that societal power is concentrated in the hands of a small, elite group, and that this minority makes the most important political decisions.

Self-Interest

Actions or decisions motivated by personal gain or benefit, often used in the context of economic behaviors and theories.