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

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?

Flotation Costs:

In order to raise finance for the long term investments,a company issues common stock, preferred stock or bonds.In order to offer these securities to the public,company will incur some costs called as flotation costs. Examples of flotation costs are registration fees,underwriting fees, and legal fees etc.

Answer and Explanation:

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The initial cost of the project to Southern Alliance company is $$24,322,830.30

In order to evaluate the initial cost we need to find the weighted...

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Cost of Capital: Flotation Cost, NPV & Internal Equity

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Chapter 3 / Lesson 18
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How does a business figure out the true cost and best means of obtaining capital? In this lesson, we will explore the cost of capital, flotation cost, net present value, and internal equity to help answer that question.


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