Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 1

The Optical World Corporation, a manufacturer of peripheral vision storage systems, needs $10 million to market its new robotics-based vision systems. The firm is considering two financing options: common stock and bonds. If the firm decides to raise the capital through issuing common stock, the flotation costs will be 6%, and the share price will be $25. If the firm decides to use debt financing, it can sell a 10-year, 12% bond with a par value of $1,000. The bond flotation costs will be 1.9%.
(a) For equity financing, determine the flotation costs and the number of shares to be sold to net $10 million.
(b) For debt financing, determine the flotation costs and the number of $1,000 par value bonds to be sold to net $10 million. What is the required annual interest payment?