Problem
Breckinridger Corp. has a debt-equity ratio of .85. The company is considering a new plant that will cost $111 million to build. When the company issues new equity, it incurs a flotation cost of 8.1 percent. The flotation cost on new debt is 3.6 percent.
i. What is the initial cost of the plant if the company raises all equity externally?
ii. What is the initial cost of the plant if the company typically uses 65 percent retained earnings?
iii. What is the initial cost of the plant if the company typically uses 100 percent retained earnings?