1. Cully Company needs to raise $27 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 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 14 percent, for new preferred stock, 7 percent, and for new debt, 3 percent. What is the true initial cost figure Southern should use when evaluating its project?

Multiple Choice

-$29,817,780

-$31,010,491

-$24,840,000

-$28,625,069

-$29,551,500

2. Fama's Llamas has a weighted average cost of capital of 12.5 percent. The company's cost of equity is 16.5 percent, and its pretax cost of debt is 9 percent. The tax rate is 32 percent. What is the company's target debt-equity ratio?

• 0.6583

• 0.5956

• 0.652

• 1.1429

• 0.627