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

Suppose your company needs $20 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 8.5 percent, but the flotation cost for debt is only 3.5 percent. What is the true cost of building the new assembly line after taking floatation costs into account?

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Answer #1

Debt equity ratio is 0.75.

Firm WACC is calculated below:

The true cost of building is calculated below:

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