Caughlin Company needs to raise $70 million to start a new project and will rais

Question

Caughlin Company needs to raise $70 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, 15 percent preferred stock, and 25 percent debt. Flotation costs for issuing new common stock are 12 percent, for new preferred stock, 9 percent, and for new debt, 2 percent. What is the true initial cost figure the company should use when evaluating its project?

Explanation / Answer

True initial cost figure should be $ 77,122,878, since $ 7,122,878 is total flotation cost.

* $ 42,000,000 / 0.88 = $ 47,727,273

Source of capital Capital Structure Flotation costs Issue of capital needed Common stock 42,000,000 0.12 47,727,273* Preferred Stock 10,500,000 0.09 11,538,462 Debt 17,500,000 0.02 17,857,143 70,000,000 77,122,878

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