Which of the following statements is true of flotation costs?
A) Flotation costs decrease the cost of preferred stock to the issuing firm.
B) Flotation costs are added to the issue price of preferred stock to compute the cost of preferred stock.
C) Floatation costs are added to the cost of debt to compute the weighted average cost of capital of a firm.
D) Floatation costs result in higher funds available from the issue of preferred stock to the firm.
E) Floatation costs increase the rate the issuing firm must earn to pay the preferred dividend.

Question

Quizplus · Accepted Answer

Flotation costs are the costs incurred by a company when it issues new securities, and they effectively increase the cost of capital. For preferred stock, these costs mean the firm must earn a higher rate to cover the preferred dividend and the flotation costs.

Which of the Following Statements Is True of Flotation Costs