Flotation costs are the costs incurred by a company when it issues new securities. These costs can include underwriting fees, legal fees, and registration fees. When a company issues new shares, these costs effectively reduce the amount of capital raised, which can lead to a decline in the stock value as the market adjusts for the dilution of equity and the direct costs associated with issuing new shares.

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Flotation Costs

Question 230

Multiple Choice

Flotation costs:

A) Are an argument for a high dividend policy.
B) Increase the effectiveness of homemade dividends.
C) Cause the value of stock to decline when new shares are issued.
D) Tend to increase the growth rate of a firm.
E) Decrease the costs associated with homemade dividends.

Correct Answer: