When a firm has flotation costs equal to 8.3 percent of the funding need, project analysts should:
A) increase the project's discount rate to offset these expenses by multiplying the company's WACC by 1.083.
B) increase the project's discount rate to offset these expenses by dividing the company's WACC by (1 − .083).
C) add 8.3 percent to the company's firm's WACC to determine the discount rate for the project.
D) increase the initial project cost by multiplying that cost by 1.083.
E) increase the initial project cost by dividing that cost by (1 − .083).

Question

Quizplus · Accepted Answer

To account for flotation costs equal to 8.3 percent of the funding need, the correct approach is to adjust the initial project cost. This is done by dividing the initial cost by (1 - .083), which effectively increases the project cost to cover the flotation expenses. This method ensures that the analysis reflects the true cost of the project, including the additional expenses incurred from raising new capital.

When a Firm Has Flotation Costs Equal to 8