Question

Alex needs to raise $45 million to embark on a new project. The company targeted capital...

Alex needs to raise $45 million to embark on a new project. The company targeted capital structure of 45% common stock, 5% preferred stock, and 50% debt. The administrative and underwriter fees are 4%,5%, and 6%, respectively. What is the gross amount he actually needs to raise for the new project after taking into consideration the cost it has incurred?

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Answer #1

The amount of common stock = $ 45 million × 45% = $ 20.25 Million

The amount of preferred stock = $ 45 million × 5% = $ 2.25 million

The amount of debt = $ 45 million × 50% = $ 22.5 million

Let's figure out the underwriter and administrative fees on different components of capital:

Administrative and Underwriter fees on common stock = $ 20.25 × 4% = $ 0.81 million

Administrative and Underwriter fees on preferred stock = $ 2.25 million × 5% = 0.1125 million

Administrative and Underwriter fees on debt = $ 22.5 million × 6% = $ 1.35 million

Total Administrative and Underwriter fees = $ 0.81 million + $ 0.1125 million + $ 1.35 million

= $ 2.2725 million

Gross amount needed for the project = Cost of project + Administrative and Underwriter fees

= $ 45 million + $ 2.2725 million

= $ 47.2725 million

That is the gross amount actually needs to raise for the new project after taking into consideration the cost is $ 47.2725 million ( $ 47,272,500).

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