To Finance Its Ongoing Construction Project, Bowen-Roth Inc

question 9

Multiple Choice

To finance its ongoing construction project, Bowen-Roth Inc.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 issue 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 3 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 3 separate issues?

• A) $79,425
• B) $83,606
• C) $88,006
• D) $92,406
• E) $97,027

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Definitions:

Division of Labor

The allocation of different parts of a manufacturing process or task to different individuals in order to improve efficiency.

Hierarchy of Authority

The structured ranking of positions within an organization, where every level is subordinate to the one above it.

Departmentalization

The method an organization uses to structure itself by dividing responsibilities among different departments or units based on task, function, product, geography, or customer.

James D. Thompson

A sociologist known for his contributions to organizational theory, particularly for his work on organizations as open systems and technologies.