Southern Alliance Company needs to raise $21 million to start a new project and

Question

Southern Alliance Company needs to raise $21 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 55 percent common stock, 11 percent preferred stock, and 34 percent debt. Flotation costs for issuing new common stock are 8 percent, for new preferred stock, 7 percent, and for new debt, 4 percent. What is the true initial cost figure Southern should use when evaluating its project?

$22,371,300
$19,670,000
$23,365,786
$21,568,418
$22,467,102

Explanation / Answer

Floatation Cost = 55%*8% +11%*7% + 34%*4% = 6.5300% Floatation cost = 6.5300%*$21 million = 1.3713 million true initial cost figure Southern should use when evaluating its project = $21 million +1.3713 million = $22,371,300 Answer $22,371,300

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