“Calculating Flotation Costs Suppose your company needs $20 million to build a new assembly line. Your target debt-equity ratio is .

“Calculating Flotation Costs Suppose your company needs $20 million to builda new assembly line. Your target debt-equity ratio is .75. The flotation cost fornew equity is 8 percent, but the flotation cost for debt is only 4 ercent. Yourboss has decided to fund the project by borrowing money, because the flotationcosts are lower and the needed funds are relatively small.a. What do you think about the rationale behind borrowing the entire amount?b. What is your company’s weighted average flotation cost?c. What is the true cost of building the new assembly line after taking flotationcosts into account? Does it matter in this case that the entire amount is beingraised from debt?







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