The flotation cost for a company is computed as:
A) the arithmetic average of the flotation costs of both debt and equity.
B) the weighted average of the flotation costs associated with each form of financing.
C) the geometric average of the flotation costs associated with each form of financing.
D) one-half of the flotation cost of debt plus one-half of the flotation cost of equity.
E) a weighted average based on the book values of the company's outstanding securities.

Question

Quizplus · Accepted Answer

The flotation cost for a company is calculated as the weighted average of the flotation costs associated with each form of financing. This is because the cost of issuing debt and equity can vary, and the company may choose to use a combination of both to raise funds. Therefore, it is appropriate to calculate the flotation cost based on the proportion of funds raised through each source.

The Flotation Cost for a Company Is Computed As