The target debt-equity ratio for Judson Inc., we need to calculate the total flotation cost for the equity and debt. We also know that the project cost is $14.4 million and the flotation costs are $765,000. By setting up an equation based on the target debt-equity ratio is 0.6927.
The total flotation cost for the equity can be calculated by multiplying the equity amount raised by the flotation cost percentage, and similarly for debt. Let's denote the amount raised as E for equity and D for debt. The project cost is $14.4 million, and the flotation costs are $765,000. So, the total amount raised is E + D = $14,400,000 + $765,000 = $15,165,000. The equity flotation cost is 0.074 × E and the debt flotation cost is 0.034 × D. The total flotation cost is given by:
Total Flotation Cost = 0.074 × E + 0.034 × D
We also know that E + D = $15,165,000. Now, we need to set up an equation to represent the target debt-equity ratio. Let r be the target debt-equity ratio, then we have:
D/E = r
Substituting D = r × E into the total flotation cost equation, we get:
Total Flotation Cost = 0.074 × E + 0.034 × (r × E)
Now, we can solve for r:
Total Flotation Cost = 0.074 × E + 0.034 × r × E
Given that Total Flotation Cost = $765,000, we can set up the equation:
$765,000 = 0.074 × E + 0.034 × r × E
Now, solve for r:
0.034 × r × E = $765,000 - 0.074 × E
r = ($765,000 - 0.074 × $15,165,000) / (0.034 × $15,165,000)
Substitute the known values:
r = ($765,000 - 0.074 × $15,165,000) / (0.034 × $15,165,000)
r = 0.6927