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 65 percent common stock, 10 percent preferred stock, and 25 percent debt. Flotation costs for issuing new common stock are 11 percent, for new preferred stock, 6 percent, and for new debt, 5 percent. What is the true initial cost figure Southern should use when evaluating its project?(Do not round your intermediate calculations.)

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 65 percent common stock, 10 percent preferred stock, and 25 percent debt. Flotation costs for issuing new common stock are 11 percent, for new preferred stock, 6 percent, and for new debt, 5 percent. What is the true initial cost figure Southern should use when evaluating its project?(Do not round your intermediate calculations.)

Explanation / Answer

Common Stock

2400000 x 65%

=1560000

Flotation cost

1,690,000 x 10%

=156000

Preferred Stock

2400000 x 11%

=264000

Flotation charge

264000 x 6%

=15840

Debts

2400000 x 25%

=600000

Flotation

600000 x 5%

=30000

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