Asked by David Crouch on Jun 23, 2024
Verified
The best way to adjust for the existence of flotation costs is to add their %age cost to the WACC.
Flotation Costs
The expenses incurred by a company in issuing new securities, including legal, accounting, and underwriting fees.
WACC
Abbreviation for Weighted Average Cost of Capital, a calculation of a firm's cost of capital in which each category of capital is proportionately weighted, reflecting the cost of each type of capital (debt, equity, etc.) to the overall business.
- Comprehend the significance of flotation costs in project financing.
Verified Answer
MS
Muhammad ShabanJun 28, 2024
Final Answer :
False
Explanation :
Flotation costs should be incorporated into the project's initial cash outflows rather than adjusting the WACC, as adding them to the WACC can distort the discount rate and lead to incorrect investment decisions.
Learning Objectives
- Comprehend the significance of flotation costs in project financing.