Problem:
Suppose your company needs $17 million to build a new assembly line. Your target debt Equity ratio is 0.65. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 3 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: Please provide full description.