Southern Alliance Company needs to raise $45 million to start a new project and

Question

Southern Alliance Company needs to raise $45 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 65 percent common stock, 5 percent preferred stock, and 30 percent debt. Flotation costs for issuing new common stock are 9 percent, for new preferred stock, 6 percent, and for new debt, 3 percent. The true initial cost figure Southern should use when evaluating its project is ?

Explanation / Answer

Cost of project = 45,000,000

Floatation cost (45,000,000 x 7.05%) = $3,172,500

Total Initial Cost = $48,172,500

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