Southern Alliance Company needs to raise $22 million to start a new project and

Question

Southern Alliance Company needs to raise $22 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, 11 percent preferred stock, and 29 percent debt. Flotation costs for issuing new common stock are 13 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.)

$25,295,743

$24,322,830

$23,349,917

$24,101,000

$20,240,000

Explanation / Answer

Project cost of Southern should be initial figure $ 24101000.00

One million = 10,00,000 $22 million $22,000,000.00 ($22*1000000) Particular New Common Stock New Preferred stock New Debt Total 60% 11% 29% 100% Project Raised $13,200,000.00 $2,420,000.00 $6,380,000.00 $22,000,000.00 Add: Floataion Cost $1,716,000.00 $193,600.00 $191,400.00 $2,101,000.00 13% 8% 3% Total Project Cost $14,916,000.00 $2,613,600.00 $6,571,400.00 $24,101,000.00

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