Europa Corporation Is Financing an Ongoing Construction Project

Multiple Choice

Europa Corporation is financing an ongoing construction project.The firm will need $5,000,000 of new capital during each of the next 3 years.The firm has a choice of issuing new debt or equity each year as the funds are needed,or issuing only debt now and equity later.Its target capital structure is 40% debt and 60% equity,and it wants to be at that structure in 3 years,when the project has been completed.Debt flotation costs for a single debt issue would be 1.6% of the gross debt proceeds.Yearly flotation costs for three separate issues of debt would be 3.0% of the gross amount.Ignoring time value effects,how much would the firm save by raising all of the debt now,in a single issue,rather than in three separate issues?

A) $79,425
B) $83,606
C) $88,006
D) $92,406