P14-19 Calculating Flotation Costs [L04] Southern Alliance Company needs to rais

Question

P14-19 Calculating Flotation Costs [L04] Southern Alliance Company needs to raise $28 milion 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 55 percent common stock, 10 percent preferred stock, and 35 percent debt Flotation costs for issuing new common stock are 15 percent, for new preferred stock, 7 percent, and for new debt, 5 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermedlate calculations.) O$25,480,000 O $32.609,182 O $31,354,983 o $30100784 O $30.996,000

Explanation / Answer

weighted average flotation cost = [15*.55]+[7*.10]+[5*.35]

           = 8.25+ .70+ 1.75

          = 10.70%

Amount raised =Amount needed /(1 - flotation cost)

                    = 28,000,000 /(1-.107)

                    = 28,000,000 / .893

                   = $ 31,354,983.20

correct option is " C"

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