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Problem:

Suppose your company needs $12 million to build a new assembly line. Your target debt?equity ratio is 0.40. The flotation cost for new equity is 8 percent, but the flotation cost for debt is only 5 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.

Required:

Question 1: What is your company's weighted average flotation cost, assuming all equity is raised externally?

Question 2: What is the true cost of building the new assembly line after taking flotation costs into account?

Note:Provide specific examples to support your answers.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91167516

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