Problem:
Caughlin Company needs to raise $40 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 50 percent common stock, 15 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 8 percent, for new preferred stock, 5 percent, and for new debt, 2 percent.
Required:
Question: What is the true initial cost figure the company should use when evaluating its project?
Note: Be sure to show how you arrived at your answer.