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Flotation costs

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Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 9 percent loan, with gross proceeds of $4,250,000. Kendrick's pretax cost of debt is 9 percent. Flotation costs are estimated to be 1.25 percent of gross proceeds and will be amortized using a straight-line schedule over the 10-year life of the loan. Kendrick is subject to a corporate tax rate of 40 percent. The loan will not increase the risk of financial distress for the firm.

1.Calculate the net present value of the loan excluding flotation costs.
2.Calculate the net present value of the loan including flotation costs.

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Solution Summary

The present value of the flotation cost tax shield is found.

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Cost of preferred stock; cost after flotation costs

Taylor Systems has just issued preferred stock. The stock has a 12% annual dividend and a $100 par value and was sold at $97.50 per share. In addition, flotation costs of $2.50 per share must be paid.

a. Calculate the cost of the preferred stock.
b. If the firm sells the preferred stock with a 10% annual dividend and nets $90.00 after flotation costs, what is its cost?

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