An increase in flotation costs will most likely result in which of the following?
A) smaller dividend payments so that less external equity financing is needed
B) larger dividend payments so shareholders are able to earn their required returns
C) larger dividend payments to offset higher taxes paid by investors
D) no change in dividend policies because flotation costs are paid by purchasers of common stock

Question

Quizplus · Accepted Answer

If flotation costs increase, it becomes more expensive to issue new common stock to raise external equity financing. To offset these higher costs, the company may choose to reduce the amount of external equity financing needed, which could result in smaller dividend payments.

An Increase in Flotation Costs Will Most Likely Result in Which