Caughlin Company needs to raise $55 million to start a new project

Finance Nov 21, 2020

Caughlin Company needs to raise $55 million to start a new project. They have a target capital structure of 70% common stock, 5% preferred stock, and 25% debt. Flotation costs for issuing new common stock are 9%, 6% for preferred stock, and 3% for debt. What is the true initial cost figure the company should use when evaluating this project?

Expert Solution

Computation of Amount Raised:

Weighted Average Flotation Cost = [70%*9%]+[5%*6%]+[25%*3%]

= 6.30% + 0.30% + 0.75%

Weighted Average Flotation Cost = 7.35%

Amount Raised =Amount Needed /(1 - Flotation Cost)

= $55 million/(1-7.35%)

Amount Raised = $59.36 million or $59,363,194.82

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