QUESTION 1

PART 1

P14-19 Calculating Flotation Costs [L04]

Southern Alliance Company needs to raise $25 million to start a new project. The company has a target capital structure of 65 percent common stock, 11 percent preferred stock, and 24 percent debt. Flotation costs for issuing new common stock are 14 percent, for new preferred stock, 7 percent, and for new debt, 5 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations. Note: calculate the weighted average flotation costs (f) first.)

Multiple Choice

• $28,111,998

• $22,833,333

• $29,236,478

• $27,767,500

• $26,987,518

PART 2

Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 24,000 shares of stock. The debt and equity option would consist of 15,000 shares of stock plus $270,000 of debt with an interest rate of 7 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes. (Please note that because of rounding you will not get the exact answer).

Multiple Choice

• $24,192.00

• $27,216.00

• $21,168.00

• $30,240.00

• $50,400.00