Question

Southern Alliance Company needs to raise $25 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, 8 percent preferred stock, and 42 percent debt. Flotation costs for issuing new common stock are 11 percent, for new preferred stock, 6 percent, and for new debt, 6 percent. What is the true initial cost figure Southern should use when evaluating its project

Answer 1

Solution:

Calculation of the True Initial Cost Figure Southern Should use When Evaluating its Project:

First we have to Calculate the Weighted Average Flotation Cost as follows,

Then we have to Calculated the Total Equipment Cost Including Flotation Costs as follows,

Therefore, the True Initial Cost Figure Southern Should use When Evaluating its Project is $27,322,404.37.