value 10.00 points Caughlin Company needs to raise $40 million to start a new pr

Question

value 10.00 points Caughlin Company needs to raise $40 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 50 percent common stock, 15 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 8 percent, for new preferred stock, 5 percent, and for new debt, 2 percent. What is the true initial cost figure the company should use when evaluating its project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount, e.g., 32.) Initial cost

Explanation / Answer

Flotation cost of new debt is to be considered as cash outflow while calculating NPV

40$ million are to be raised by issuing new bonds.

Flotation cost 2% = 40*0.02= 0.8$ million

Total initial cost = 40+0.8$ million= 40.8$ million.

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