Question

# Southern Alliance Company needs to raise \$26 million to start a new project and will raise...

Southern Alliance Company needs to raise \$26 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, 11 percent preferred stock, and 24 percent debt. Flotation costs for issuing new common stock are 10 percent, for new preferred stock, 8 percent, and for new debt, 3 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.)

\$28,291,621 \$28,106,000 \$27,159,956 \$29,423,286 \$24,180,000

#### Homework Answers

Answer #1

TOTAL INITIAL COST OF SOUTHERN ALLIANCE

Total Initial cost=cost of project+ Flotation cost of stock and debt

\$26,000,000+\$2,106,000=\$28,106,000

Workings for total flotation costs

 Capital structure Working Amount flotaion cost(%) flotaion cost Common stock(65%) \$26million*65/100 \$ 16,900,000.00 10% \$ 1,690,000.00 Preferred stock(11%) \$26million*11/100 \$    2,860,000.00 8% \$    228,800.00 Debt(24%) \$26million*24/100 \$    6,240,000.00 3% \$    187,200.00 TOTAL \$ 26,000,000.00 \$ 2,106,000.00
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