Can you please provide a step by step instruction to get to the solution of the...
Can you please provide a step by step instruction to get to the solution of the below question. Calculating Flotation Costs. Southern Alliance Company needs to raise $75 million to start a new project and will raise 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?
Homework Answers
WACC=Respective costs*Respective weight
=(0.7*7)+(0.05*4)+(0.25*3)=5.85%
Hence true initial cost=$75,000,000/(1-WACC)
=$75,000,000/(1-0.0585)
=$79,660,116.83(Approx).
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