14 10.00 points Caughlin Company needs to raise $50 million to start a new proje

Question

14 10.00 points Caughlin Company needs to raise $50 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, 10 percent preferred stock, and 40 percent debt. Flotation costs for issuing new common stock are 6 percent, for new preferred stock, 3 percent, and for new debt, 1 percent. What is the true initial cost figure the company should use when evaluating its project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount, e.g., 32.) Initial cost

Explanation / Answer

The true initial cost figure is $ 51,921,079.96. Working is provided below.

Weighted Average Floating Cost:

0.50(6)+0.10(3)+0.40(1)

=3+0.30+0.40

=3.70%

Initial Cost- Including Flotation costs=       50,000,000/(1-0.0370)

                                                                 =50,000,000/0.9630

                                                                  =$ 51,921,079.96

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