Southern Alliance Company needs to raise $26 million to start a new project and

Question

Southern Alliance Company needs to raise $26 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 50 percent common stock, 9 percent preferred stock, and 41 percent debt. Flotation costs for issuing new common stock are 11 percent, for new preferred stock, 6 percent, and for new debt, 5 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.) $24,093,333 $29,420,085 $28,103,400 $27,157,001 $28,288,543

Explanation / Answer

Weighted average floation cost=50%*11%+9%*6%+41%*5%=8.09%

total cost of the equipment including flotation costs

amounts raised*(1-0.0809)=26000000

amount raised=26000000/0.919=$28,288,543

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