Southern Alliance Company needs to raise $28 million to start a new project and

Question

Southern Alliance Company needs to raise $28 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 60 percent common stock, 10 percent preferred stock, and 30 percent debt. Flotation costs for issuing new common stock are 15 percent, for new preferred stock, 7 percent, and for new debt, 6 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.)
$31,638,418
$25,386,667
$30,372,881
$32,903,955
$31,220,000

Explanation / Answer

Let the total euity to be raised be X,
Common Stock to be raised= X*0.6*0.85
Prefered Stock to be raised= X*0.1*0.93
Debt to be raised = X*0.3*0.94

Threfore according to problem,
(X*0.6*0.85)+(X*0.1*0.93)+(X*0.3*0.94) = $28 m
0.885 X = $28 m
X = $28 m/0.885

X = $31638418.079

Therefore capital raised to be is $31638418.079

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