Suppose your company needs $50 million to build a new store in NYC. Your target debt equity ratio is 1.0. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 3 percent.
If the firm finances debt externally but use retained earning to support equity financing, according to the target debt- equity ratio, what is the true cost of building the new store after taking flotation costs into account? (in integral $)
What if the firm finances both debt and equity externally?