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