Generate no internal equity for the foreseeable future

Assignment Help Financial Management

Reference no: EM13766306

Southern Alliance Company needs to raise $21 million to start a new project. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 11 percent preferred stock, and 34 percent debt. Flotation costs for issuing new common stock are 8 percent, for new preferred stock, 8 percent, and for new debt, 3 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.)

HINT: Since the company generates no Retained Earnings, all of the project will be financed externally. Calculate the weighted average floatation cost. Use this number to figure out how much money the company must pay to issue the new securities. Remember that the total amount raised, net of the financing cost, must leave the company with exactly $21 million to start the project. This financing cost must be added to the start-up cost of the project to get the true, total cost.

Reference no: EM13766306

Questions Cloud

Stock dividend-dividend is paid : An investor owns 1000 shares of stock in ABC Corp. with a market value of $1,200. ABC declares a 20% stock dividend. After the dividend is paid, John owns____________

Residual dividend theory and expectations theory : A firm declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet the stock declined by 3% the day of the announcement. Another firm declared a dividend of $2 per share, which was the same as the prior year, and its st..

Grade book program for his class : Your English instructor, realizing you are a programmer, asks you to write a Grade Book program for his class to help him compute final grades. Design a program that asks for the student's name and four test grades.

Organisational objectives that hr function is responsible : Identify major organisational objectives that the HR function is responsible for delivering and explain how these objectives are evolving in the contemporary environment.

Generate no internal equity for the foreseeable future : Southern Alliance Company needs to raise $21 million to start a new project. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 11 percent preferred stock, a..

Target debt equity ratio : Sixx AM Manufacturing has a target (market value) debt equity ratio of 0.6. Its cost of equity is 19 percent, and its cost of debt is 9 percent. If the tax rate is 34 percent, what is the company's WACC?

Tax planning and fiscal policy : After reviewing the scenario, discuss at least three (3) pros and three (3) cons for converting personal property to business use, and recommend at least two (2) implementation strategies that would increase the depreciable bases used to calculate..

Return based on an assets systematic risk : The Up and Coming Corporation's common stock has a beta of 1.5. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, what is the company's cost of equity capital?

Are fusion centers now being used as a local law enforcement : Are fusion centers now being used as a local law enforcement tool to help fight local crime? Why or why not? Post a new topic to the Discussion Board that contains your responses to the above questions

User Account

All Pages