5. Goff Company needs to raise $80 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 percent common stock, 5 percent preferred stock, and 30 percent debt. Flotation costs for issuing new common stock are 6 percent, for new preferred stock, 4 percent, and for new debt, 2 percent. What is the true initial cost figure the company should use when evaluating its project?
Calculation on initial cost | |||
Component | Cost | Weight | Cost * Weight |
A | B | A*B | |
Equity | 6.00% | 65.00% | 3.900% |
Preferred Stock | 4.00% | 5.00% | 0.200% |
Debt | 2.00% | 30.00% | 0.600% |
WACC | 4.70% |
So the initial cost will be 4.70%
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