15.4 The Edison Power Company currently owns and operates a coal-fired combustion turbine plant that was installed 20 years ago. Because of degrada- tion of the system, 65 forced outages occurred during the last year alone and two boiler explosions during the last seven years. Edison is planning to scrap the current plant and install a new, improved gas-turbine plant that produces more energy per unit of fuel than typical coal-fired boilers produce. The new 50-MW gas-turbine plant, which runs on gas- ified coal, wood, or agricultural wastes, will cost Edi- son $65 million. Edison wants to raise the capital from three financing sources: 45% common stock, 10% pre- ferred stock (which carries a 6% cash dividend when declared), and 45% borrowed funds. Edison's invest- ment banks quote the following flotation costs: Financing Source Par Value Flotation Costs 4.6% 8.1 Common stock Preferred stock Bond Selling Price $32/share 55/share 980 $10 IS 1,000 (a) What are the total flotation costs to raise $65 million? (b) How many shares (both common and preferred) or bonds must be sold to raise $65 million? (c) If Edison makes annual cash dividends of $2 per common share and annual bond interest pay- ments are at the rate of 12%, how much cash should Edison have available to meet both the equity and debt obligation? (Note that whenever a firm declares cash dividends to its common stockholders, the preferred stockholders are entitled to receive dividends of 6% of par value.) 15.4 The Edison Power Company currently owns and operates a coal-fired combustion turbine plant that was installed 20 years ago. Because of degrada- tion of the system, 65 forced outages occurred during the last year alone and two boiler explosions during the last seven years. Edison is planning to scrap the current plant and install a new, improved gas-turbine plant that produces more energy per unit of fuel than typical coal-fired boilers produce. The new 50-MW gas-turbine plant, which runs on gas- ified coal, wood, or agricultural wastes, will cost Edi- son $65 million. Edison wants to raise the capital from three financing sources: 45% common stock, 10% pre- ferred stock (which carries a 6% cash dividend when declared), and 45% borrowed funds. Edison's invest- ment banks quote the following flotation costs: Financing Source Par Value Flotation Costs 4.6% 8.1 Common stock Preferred stock Bond Selling Price $32/share 55/share 980 $10 IS 1,000 (a) What are the total flotation costs to raise $65 million? (b) How many shares (both common and preferred) or bonds must be sold to raise $65 million? (c) If Edison makes annual cash dividends of $2 per common share and annual bond interest pay- ments are at the rate of 12%, how much cash should Edison have available to meet both the equity and debt obligation? (Note that whenever a firm declares cash dividends to its common stockholders, the preferred stockholders are entitled to receive dividends of 6% of par value.)