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Question 15.S-TP.1: Flotation Costs The L5 Corporation is considering an equity ...

Flotation Costs The L5 Corporation is considering an equity issue to finance a new space station. A total of $15 million in new equity is needed. If the direct costs are estimated at 7 percent of the amount raised, how large does the issue need to be? What is the dollar amount of the flotation cost?

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The firm needs to net $15 million after paying the 7 percent flotation costs. So the amount raised is given by:

Amount raised × (1 − .07) = $15 million

Amount raised = $15 million/.93 = $16.129 million

The total flotation cost is thus $1.129 million.

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