The BIM Corporation has decided to build a new facility for its R&D department. The cost of the facility is estimated to be $125 million. BIM wishes to finance this project using its traditional debt-equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total flotation cost?

$3,750.000

Explanation:

Debt / Equity = 1.5

Let represent equity = x

Debt= 1.5x

Hence, x + 1.5x = $125,000,000

2.5x = $125,000,000

x = $125,000,000/2.5

x (Equity) = $50,000,000

Debt = $125,000,000 - $50,000,000

Debt = $75,000,000

issue cost = Debt*Cost of debt + Equity*Cost of Equity

issue cost = $75,000,000*1% + $50,000,000*6%

issue cost = $750,000 + $3,000,000

issue cost = $3,750.000

Hence, total flotation cost is $3,750.000

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation:

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