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The Edison Power Company currently owns/operates a coal-fired combustion turbine plant installed 20 years ago....

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Accounting

The Edison Power Company currently owns/operates a coal-fired combustion turbine plant installed 20 years ago. Edison plans to scrap the existing plant in favor of a more efficient gas-turbine plant.

The new 50-MW gas-turbine plant will cost $65 million. Edison plans to raise the capital from three sources: common stock (45%), preferred stock, (10%), and bonds (45%). The flotation costs are

Source Flotation Cost Selling Price Par Value
Common Stock 4.6% $32/Share $10
Preferred Stock 8.1% $55/Share $15
Bond 1.4% $980/Bond $1000

(a) What is the total flotation cost to raise $65 million?

(b) How many of each: common shares, preferred shares, and bonds, must be sold to raise $65 million?

(c) If Edison pays a $2 annual dividend on common shares and the interest on bond payments is 12%, how much cash should Edison have available to meet both equity and debt obligations? (Note: when common stock dividends are paid to common stockholders, preferred stockholders receive dividends at 6% of par value.)

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