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Cully Company needs to raise $20 million to start a new project and will raise the...

Cully Company needs to raise $20 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 65 percent common stock, 9 percent preferred stock, and 26 percent debt. Flotation costs for issuing new common stock are 9 percent, for new preferred stock, 6 percent, and for new debt, 5 percent. What is the true initial cost figure Southern should use when evaluating its project?

$20,799,480

$21,666,125

$22,532,770

$18,666,667

$21,538,000

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Answer #1

Weighted average cost=Respective cost*Respective weight

=(0.65*9)+(0.09*6)+(0.26*5)=7.69%

True initial cost=20,000,000/(1-Weighted average cost)

=20,000,000/(1-0.0769)

which is equal to

=$21,666,125(Approx)

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