Southern Alliance Company needs to raise $30 million to start a new project. T

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    Southern Alliance Company needs to raise $30 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 50 percent common stock 11 percent preferred stock and 39 percent debt. Flotation costs for issuing new common
    stock are 9 percent for new preferred stock 7 percent and for new debt 2 percent. What is the true initial cost figure Southern should use when evaluating
    its project?

    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 $30 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.

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