Because of ﬂotation costs, a low-dividend policy is best.

Question

Quizplus · Accepted Answer

Flotation costs refer to the costs that a company incurs when it issues new stocks or bonds. These costs include fees paid to underwriters, legal fees, and printing costs. A low-dividend policy means retaining more earnings within the company instead of paying dividends to the shareholders. This reduces the need for external financing, which in turn reduces the flotation costs. Therefore, a low-dividend policy is best to minimize the impact of flotation costs.

Because of ﬂOtation Costs, a Low-Dividend Policy Is Best