Question

Southern Alliance Company needs to raise $25 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 55 percent common stock, 9 percent preferred stock, and 36 percent debt. Flotation costs for issuing new common stock are 12 percent, for new preferred stock, 6 percent, and for new debt, 6 percent. What is the true initial cost figure Southern should use when evaluating its project?

Answer 1

Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $2.9 million, and the company paid $212,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.5 percent of the amount raised, whereas the debt issued had a flotation cost of 3.5 percent of the amount raised. If Goodbye issued new securities in the same proportion as its target capital structure, the company's target debt-equity ratio is?

Answer 2

.5422