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 55 percent common stock, 9 percent preferred stock, and 36 percent debt. Flotation costs for issuing new common stock are 12 percent, for new preferred stock, 6 percent, and for new debt, 6 percent. What is the true initial cost figure Southern should use when evaluating its project?

Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $2.9 million, and the company paid $212,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.5 percent of the amount raised, whereas the debt issued had a flotation cost of 3.5 percent of the amount raised. If Goodbye issued new securities in the same proportion as its target capital structure, the company's target debt-equity ratio is?

.5422

To find the true initial cost figure that Southern Alliance Company should use when evaluating its project, we need to calculate the weighted average cost of capital (WACC) based on the target capital structure and the flotation costs associated with each source of capital.

Step 1: Calculate the weighted average flotation cost.
- Flotation cost of common stock = 12%
- Flotation cost of preferred stock = 6%
- Flotation cost of debt = 6%

Step 2: Calculate the weights of each capital component.
- Weight of common stock = 55%
- Weight of preferred stock = 9%
- Weight of debt = 36%

Step 3: Calculate the weighted average flotation cost.
(WACC) = (Weight of common stock * Flotation cost of common stock) + (Weight of preferred stock * Flotation cost of preferred stock) + (Weight of debt * Flotation cost of debt)
= (0.55 * 0.12) + (0.09 * 0.06) + (0.36 * 0.06)

Step 4: Calculate the true initial cost figure.
True Initial Cost Figure = WACC * Total Capital Raised
The total capital raised is given as $25 million.

Now, let's calculate the WACC:
WACC = (0.55 * 0.12) + (0.09 * 0.06) + (0.36 * 0.06)
WACC = 0.0666 or 6.66%

Finally, calculate the true initial cost figure:
True Initial Cost Figure = 0.0666 * $25,000,000
True Initial Cost Figure = $1,665,000

Therefore, the true initial cost figure that Southern Alliance Company should use when evaluating its project is $1,665,000.