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Flotation Costs

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Southern Alliance Company needs to raise $30 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 60 percent common stack, 10 percent preferred stock, and 30 percent debt. Flotation costs for issuing new common stack are 10 percent, for new preferred stock, 7 percent, and for new debt, 4 percent. What is the true initial cost figure Southern should use when evaluating its project?

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Solution Summary

The solution explains how to calculate the flotation costs relating to raising capital.

Solution Preview

First step is to calculate the weighted average flotation cost
Weighted average flotation ...

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