Cully Company needs to raise $22 million to start a new project and will raise the...
Cully 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 70 percent common stock, 10 percent preferred stock, and 20 percent debt. Flotation costs for issuing new common stock are 14 percent, for new preferred stock, 6 percent, and for new debt, 4 percent. What is the true initial cost figure Southern should use when evaluating its project?
Homework Answers
WACC=Respective costs*Respective weight
=(0.7*14)+(0.1*6)+(0.2*4)
=11.2%
Hence true initial cost=$22,000,000/(1-WACC)
=$22,000,000/(1-0.112)
which is equal to
$24,774,774.77(Approx).
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