Which of the following statements is true of flotation costs? Flotation costs de
ID: 2803307 • Letter: W
Question
Which of the following statements is true of flotation costs?
Flotation costs decrease the cost of preferred stock to the issuing firm.
Flotation costs are added to the issue price of preferred stock to compute the cost of preferred stock.
Floatation costs are added to the cost of debt to compute the weighted average cost of capital of a firm.
Floatation costs increase the rate the issuing firm must earn to pay the preferred dividend.
A.Flotation costs decrease the cost of preferred stock to the issuing firm.
B.Flotation costs are added to the issue price of preferred stock to compute the cost of preferred stock.
C.Floatation costs are added to the cost of debt to compute the weighted average cost of capital of a firm.
D.Floatation costs increase the rate the issuing firm must earn to pay the preferred dividend.
Explanation / Answer
Cost of preferred stock with floatation costs = Dividend/Current market price*(1-Floatation costs).
We may see that the current market price is taken after considering floatation costs.
FLoatation costs obviously increase the cost of preferred stock.
They donot have any effect on the rate of preferred dividend.
So, the answer is Option B
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