Suppose your company needs $10 million to build a new assembly line. Your target debt−equity ratio is .4. The flotation cost for new equity is 10 percent, but the flotation cost for debt is only 7 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.
a. What is your company's weighted average flotation cost, assuming all equity is raised externally?
b. What is the true cost of building the new assembly line after taking the flotation costs into account?