Floatation costs do not affect the cost of capital in regard to ____.

Question

Quizplus · Accepted Answer

Floatation costs are the costs incurred by a company when it issues new securities and includes expenses such as underwriting fees, legal fees, and registration fees. These costs directly affect the cost of new equity (both common and preferred stock) because they reduce the net proceeds from the issuance, thereby increasing the cost of capital for these sources. However, retained earnings do not involve such issuance costs because they are internal funds generated from the company's operations, not raised through selling new shares.

Floatation Costs Do Not Affect the Cost of Capital in Regard