Problem:

Southern Alliance Company needs to raise $29 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 12 percent, for new preferred stock, 7 percent, and for new debt, 5 percent.

Required:

Question: What is the true initial cost figure Southern should use when evaluating its project?

Note: Provide support for your rationale.