Suppose your company needs $35 million to build a new assembly line. Your target debtequity ratio is .75. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.

a. What do you think about the rationale behind borrowing the entire amount?