Company needs to raise $24 million to start a new project and will raise the mon

Question

Company needs to raise $24 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, 9 percent preferred stock, and 36 percent debt. Flotation costs for issuing new common stock are 10 percent, for new preferred stock, 6 percent, and for new debt, 6 percent. What is the true initial cost figure Southern should use when evaluating its project? Please show all work

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Weighted Average Flotation Cost = .55*10 + .09*6 + .36*6 = 8.2%

Total Cost of Equipment = Amount Raised*(1- Weighted Average Flotation Cost)

24 million = Amount Raised*(1-8.2%)

Amount Raised = 24 million/(1-8.2%) = $26143790.85 or $$26143791

Answer is $26143790.85 or $$26143791.

Thanks.

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