Problem:

Bleakly Enterprises has a capital structure of 50 percent common stock, 10 percent preferred stock, and 40 percent debt. The flotation costs are 5 percent for debt, 11 percent for preferred stock, and 8 percent for common stock. The corporate tax rate is 38 percent. What is the weighted average flotation cost if the company finances new assets using new debt, new shares of preferred stock, and Retained Earnings? Assume the company maintains the current capital structure.

Hint: Floatation costs are associated with external financing. What is the floatation cost of Retained Earnings?

• 2.80
• 3.10
• 3.20
• 2.30
• 2.40

Note: Please describe comprehensively and provide step by step solution.