Question

Gold Alliance Company needs to raise $48 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 65% common stock, 5% preferred stock, and 30% debt. Flotation costs for issuing new common stock are 8%, for new preferred stock, 4%, and for new debt, 2%. What is the initial cost figure Gold should use when evaluating its project? (Round answer to 0 decimal places. Do not round intermediate calculations).

Answer 1

The initial cost figure Gold Alliance Company should use when evaluating its project is $50.88 million, which includes $48 million to be raised and $2.88 million in flotation costs for common stock, preferred stock, and debt.

Step-by-step explanation:

To calculate the initial cost figure Gold Alliance Company should use when evaluating its project, we need to consider the total amount to be raised and the flotation costs associated with issuing common stock, preferred stock, and debt. The company aims to raise $48 million through a mix of 65% common stock, 5% preferred stock, and 30% debt, which amounts to $31.2 million, $2.4 million, and $14.4 million respectively.

The flotation costs are 8% for common stock, 4% for preferred stock, and 2% for debt. Therefore, the flotation costs will be $2.496 million for common stock ($31.2 million x 8%), $0.096 million for preferred stock ($2.4 million x 4%), and $0.288 million for debt ($14.4 million x 2%). Adding these up gives us a total flotation cost of $2.880 million.

Therefore, the total initial cost for the project including flotation costs would be the sum of the amount to be raised and the total flotation costs, which is $48 million + $2.880 million = $50.88 million. This figure is rounded to no decimal places as requested.