Maurice Tutor

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Teaching Since: May 2017
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  • MCS,PHD
    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 29 Sep 2017 My Price 5.00

Southern Alliance Company

Southern Alliance Company needs to raise $30 million to start a new project. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 50 percent common stock, 11 percent preferred stock, and 39 percent debt. Flotation costs for issuing new common stock are 9 percent, for new preferred stock, 7 percent, and for new debt, 2 percent. What is the true initial cost figure Southern should use when evaluating its project?

HINT: Since the company generates no Retained Earnings, all of the project will be financed externally. Calculate the weighted average floatation cost. Use this number to figure out how much money the company must pay to issue the new securities. Remember that the total amount raised, net of the financing cost, must leave the company with exactly $30 million to start the project. This financing cost must be added to the start-up cost of the project to get the true, total cost.

  $30,654,604
  $31,931,879
  $31,815,000
  $28,200,000
  $33,209,154

 

Answers

Maurice Tutor
(5)
Status NEW Posted 29 Sep 2017 10:09 PM My Price 5.00

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