Southern Alliance Company needs to raise $75 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 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Flotation costs for issuing new common stock are 7 percent; for new preferred stock, 4 percent; and for new debt, 3 percent. What is the true initial cost figure the company should use when evaluating its project?
13.15 Calculating Flotation Costs Southern Alliance Company needs to raise $75 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 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Flotation costs for issuing new common stock are 7 percent; for new preferred stock, 4 percent; and for new debt, 3 percent. What is the true initial cost figure the company should use when evaluating its project?
The term floatation costs refer to the costs that a company incurs whenever it engages in the process of issuing equity, preference shares, or raising debt for the company. These costs will include the costs of underwriters, legal and registration fees, etc.
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