Problem:

Trower Corp. has a debt-equity ratio of 0.85. The company is considering a new plant that will cost $111 million to build. When the company issues new equity, it incurs a flotation cost of 8.1 percent. The flotation cost on new debt is 3.6 percent.

Requirement:

Question 1: What is the initial cost of the plant if the company raises all equity externally?

Question 2: What is the initial cost of the plant if the company typically uses 65 percent retained earnings?

Question 3: What is the initial cost of the plant if the company typically uses 100 percent retained earnings?

Note: Please explain comprehensively and give step by step solution.