Final answer:
The true cost of building a new assembly line taking into account the target debt-equity ratio and flotation costs for equity and debt will be higher than $26 million, as these costs need to be added to the initial required capital.
Step-by-step explanation:
If a company needs $26 million to build a new assembly line with a target debt-equity ratio of .45, the true cost of building the assembly line will include flotation costs for both equity and debt. The cost of equity will have to take into account a 9.9 percent flotation cost, whereas the cost of debt incorporates a 4.3 percent flotation cost.
To determine the true cost, we should calculate the total amount needed including flotation costs: for equity, if we let E be the equity needed, then E + 0.099E = E(1 + 0.099) will have to equal the dollar amount that satisfies the debt-equity ratio. Similarly, for debt D, we have D + 0.043D = D(1 + 0.043). With a debt-equity ratio of 0.45, we can set up the equation 0.45 = D / E.
After finding the respective amounts of debt and equity needed and applying the flotation costs, we can sum them to determine the total true cost for building the assembly line. This demonstrates the impact of flotation costs on funding new projects and the importance of accounting for them in financial planning.