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

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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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