Problem:
Suppose your company needs $17 million to build a new assembly line. Your target debt?equity ratio is 0.75. 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.
Required:
Question: What is your company's weighted average flotation cost, assuming all equity is raised externally?
Note: Provide support for your underlying principle.