Southern Alliance Company needs to raise $23 million to start a new project and

Question

Southern Alliance Company needs to raise $23 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 14 percent, for new preferred stock, 8 percent, and for new debt, 4 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.)

rev: 09_20_2012

$25,813,692

$26,846,240

$21,006,667

$24,781,144

$25,507,000

Southern Alliance Company needs to raise $23 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 14 percent, for new preferred stock, 8 percent, and for new debt, 4 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.)

Explanation / Answer

Total money to raise 23,000,000 Composition Funds Floating cost Floating charges Total initial Cost Formula for Funds Common Stock 65% 14,950,000 14% 2093000 17,043,000 65% of 23M Preferred stock 10% 2,300,000 8% 184000 2,484,000 10% of 23M debt 25% 5,750,000 4% 230000 5,980,000 25% of 23M 100% 23,000,000 2507000 25,507,000 The correct answer is 25,507,000 Note : Floating charge is calculated as : funds value x % of floating charge

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