Northern Alliance Company needs to raise $27 million to start a new project and

Question

Northern Alliance Company needs to raise $27 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 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 14 percent, for new preferred stock, 6 percent, and for new debt, 2 percent.

What is the true initial cost figure Northern should use when evaluating its project?

Explanation / Answer

The true initial cost is equal to 0.55*14% +0.1*6% + 0.35*2% = 9%

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.