Reading 45: Cost of Capital - LOS l ～Q3 account, finance, equity, white, style

mayanfang1

Q3. The most accurate way to account for flotation costs when issuing new equity to finance a project is to:

A)   increase the cost of equity capital by dividing it by (1 – flotation cost).

B)   adjust cash flows in the computation of the project NPV by the dollar amount of the flotation costs.

C)   increase the cost of equity capital by multiplying it by (1 + flotation cost).

 

mayanfang1

答案和详解如下：

Q3. The most accurate way to account for flotation costs when issuing new equity to finance a project is to:

A)   increase the cost of equity capital by dividing it by (1 – flotation cost).

B)   adjust cash flows in the computation of the project NPV by the dollar amount of the flotation costs.

C)   increase the cost of equity capital by multiplying it by (1 + flotation cost).

Correct answer is B)

Adjusting the cost of equity for flotation costs is incorrect because doing so entails adjusting the present value of cash flows by a fixed percentage over the life of the project. In reality, flotation costs are a cash outflow that occurs at the initiation of a project. Therefore, the correct way to account for flotation costs is to adjust the cash flows in the computation of project NPV, not the cost of equity. The dollar amount of the flotation cost should be considered an additional cash outflow at initiation of the project.

 

yichen_ye

ff

dove1

Thanks

fange520

b

jacky_z

Thanks

connie198226

thanks

gladiator23

赞

duo1115

SEE

lawrence82

 Godd.......