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 70 percent common stock, 8 percent preferred stock, and 22 percent debt. Flotation costs for issuing new common stock are 14 percent, for new preferred stock, 5 percent, and for new debt, 3 percent.

Required: What is the true initial cost figure Southern should use when evaluating its project? (Do not include the dollar sign ($). Do not round the weighted average floatation cost. Round your answer to the nearest whole dollar amount. (e.g., 1,234,567)) True initial cost $_______.

Explanation / Answer

Rounding off to nearest dollar amount: $ 31,411,263

stock preferred debt A Percentage of source 70% 8% 22% B Floatation cost 14% 5% 3% C Weighed average floatation cost (Sum A*B) 10.86% D Initial amount required 28 E Amount which need to be raised to get 28 m $ = 28/(1-C) 31.41126

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