The Sprite Toy Company needs to raise funds for a major expansion of its manufacturing operations. Sprite has determined that it will issue $100 million of financing, but it has not decided whether to...

The Sprite Toy Company needs to raise funds for a major expansion of its
manufacturing operations. Sprite has determined that it will issue $100 million
of financing, but it has not decided whether to issue debt or equity. The company
is publicly traded.
a. Based on the information given in Table 3-3, compute the flotation costs that
Sprite would incur if it raises the needed funds by issuing equity only.
b. Based on the information given in Table 3-3, compute the flotation costs that
Sprite would incur if it raises the needed funds by issuing straight debt only.
c. If Sprite wants to keep its flotation costs low, which form of financing
should it use? Discuss some factors other than flotation costs that the
company should consider.

TABLE 3-3 Flotation (Issuance) Costs for Issuing Debt and Equitya
Issue Size                            Bonds^b
Equity^c

($ millions)
                                 Straight    Convertible         Seasoned          Issues IPOs
Under 10.0                  4.4%          8.8%                   13.3%                17.0%
10.0–19.9                    2.8             8.7                      8.7                     11.6
20.0–39.9                    2.4             6.1                      6.9                      9.7
40.0–59.9                    1.3             4.3                      5.9                      8.7
60.0–79.9                    2.3             3.2                      5.2                      8.2
80.0–99.9                    2.2             3.0                      4.7                      7.9
100.0–199.9                2.3             2.8                     4.2                       7.1
200.0–499.9                2.2             2.2                     3.5                       6.5
500.0 and larger         1.6              2.1                     3.2                       5.7