Final answer:
The true cost of Watta Water's new project, considering flotation costs, would be calculated based on the mix of debt and equity used to raise the $30 million. Without the specific ratio of debt to equity, we can only state that it would be more than $30 million due to the additional costs of 2% for debt and 16% for equity.
Step-by-step explanation:
The student question concerns the calculation of the true cost of a new project considering the flotation costs associated with raising external funds through debt and equity. Flotation costs are the total fees charged by investment banks when a company issues new securities and can significantly impact the final amount of funds received by the company. To calculate the true cost, we need to adjust the required funds ($30 million) by the additional costs incurred during the flotation process.
If Watta Water is raising all funds through either debt or equity, the calculation would differ based on the percentages given. For debt with 2% flotation costs, the company would need to raise $30 million / (1 - 0.02) to cover the costs. For equity with 16% flotation costs, the company would need to issue equity worth $30 million / (1 - 0.16).
However, the student has not specified the exact mix of debt and equity Watta Water would be using. It could be any ratio of debt to equity, so the actual cost will depend on that mix. If we had this information, we could calculate the weighted average of the flotation costs and apply it to the $30 million to find the total cost.