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Southern Alliance Company needs to raise $23 million to start a new project and will raise the...

Question:

Southern Alliance Company needs to raise $23 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 55% common stock, 12% preferred stock, and 33% debt. Flotation costs for issuing new common stock are 8%, for new preferred stock 9%, and for new debt 5%.

What is the true initial cost figure Southern should use when evaluating its project?

Flotation Costs:

Wen firms raise capital externally to fund new projects, they often need to issue new securities such as bonds and stocks. The flotation costs are expenses associated with issuing new securities. These expenses include underwriting fees, legal fees and other administrative fees.

Answer and Explanation:

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The true initial cost of the project is $24,150,000.

The true initial cost of the this project is the initial cash outlay plus the flotation costs. ...

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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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