Problem:
Suppose your company needs $12 million to build a new assembly line. Your target debt?equity ratio is 0.50. The flotation cost for new equity is 12 percent, but the flotation cost for debt is only 9 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: Show supporting computations in good form.