Caughlin Company needs to raise $50 million to start a new project and will rais

Question

Caughlin Company needs to raise $50 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 60 percent common stock, 10 percent preferred stock, and 30 percent debt. Flotation costs for issuing new common stock are 10 percent, for new preferred stock, 7 percent, and for new debt, 4 percent. What is the true initial cost figure the company should use when evaluating its project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount, e.g., 32.) Initial cost $

Explanation / Answer

Weighted average floating cost= Cost of Equity * Weight of Equity + Cost of Preferred Stock * Weight of Preferred Stock + Cost of Debt * Weight of Debt

Weighted average floating cost= 0.10 * 0.60 + 0.07 * 0.10 + 0.04 * 0.30

Weighted average floating cost= 0.079 or 7.90%

Total Tru Intial cost Figure of equipment including floating costs:

Amount raised * (1-.0790)=$50 million

True Initial Cost Figure = $50M / (1 - 0.079)= $54288816.50

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