Southern Alliance Company needs to raise $28 million to start a new project and

Question

Southern Alliance Company needs to raise $28 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 10 percent, for new preferred stock, 9 percent, and for new debt, 6 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.) rev: 09_20_2012 $31,905,336 $30,444,400 $25,666,667 $30,678,208 $29,451,080

Explanation / Answer

Weight of equity = 0.60

Weight of preferred stock = 0.11

Weight of debt = 0.29

Weighted average floatation cost = (10%*0.60) + (9%*0.11) + (6%*0.29) = 8.73%

Total amount required for project = $28 million

Amount to be raised = $28 million/ (1 – 0.0873) = $30,678,207.52

Hence, Answer is $30,678,208

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