Flotation costs:

Question

Flotation costs:

Quizplus · Accepted Answer

Flotation costs refer to the expenses a company incurs when issuing new securities, such as underwriting fees, legal fees, and registration fees. These costs reduce the amount of funds a company raises from the issuance of new securities, thus diluting the value of existing shares of the company. As a result, the value of stock tends to decline when new shares are issued, making option C the correct answer. Flotation costs do not necessarily affect the effectiveness of homemade dividends, nor do they argue for a high dividend policy. Flotation costs may affect a firm's growth rate, but they tend to decrease it rather than increase it. Finally, flotation costs do not decrease the costs associated with homemade dividends.

Flotation Costs