Problem:
Southern Alliance Company needs to raise $25 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, 9 percent preferred stock, and 26 percent debt. Flotation costs for issuing new common stock are 9 percent, for new preferred stock, 6 percent, and for new debt, 4 percent.
Required:
Question: What is the true initial cost figure Southern should use when evaluating its project?
Note: Be sure to show how you arrived at your answer.