Southern Alliance Company needs to raise $24 million to start a new project and

Question

Southern Alliance Company needs to raise $24 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 50 percent common stock, 11 percent preferred stock, and 39 percent debt. Flotation costs for issuing new common stock are 11 percent, for new preferred stock, 8 percent, and for new debt, 2 percent. The true initial cost figure Southern should use when evaluating its project is $.

Explanation / Answer

The true initial cost figure Southern should use when evaluating its project is = Amount to be raised by issue of Bonds + Floatation cost on issue of bonds

= 24 m + 24 m*2%

= 24 m + 0.48 m

= $24.48 m

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