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Question
Which of the following statements is true about the flotation costs that are incurred when a firm issues new securities to raise funds?
a. The higher the flotation costs associated with a preferred stock issue, the lower the firm's cost of preferred stock, rps.
b. Flotation costs should be added to the per share price of a preferred stock issue to compute the cost of preferred stock, rps.
c. Floatation costs should be added to the before-tax weighted average cost of capital to determine the firm's overall net weighted average cost of capital after taxes.
d. When it incurs flotation costs, the firm normally receives a higher amount of net proceeds from a security issue than when there are no flotation costs.
e. Floatation costs increase the cost of using funds; e.g., the cost of issuing new common stock is greater than the cost of retained earnings because the firm must pay flotation costs to issue new equity.
Answer
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