Due to changes in regulatory requirements,the transactions costs associated with selling corporate securities increased by $1 per share.This change will
A) cause the cost of capital to decrease.
B) cause the cost of capital to increase.
C) have no effect on the cost of capital because transactions costs are expensed immediately.
D) cause the cost of capital to decrease only if investors may be billed for part of the increase in transactions costs.

Question

Quizplus · Accepted Answer

The increase in transaction costs will increase the cost of capital. This is because the cost of capital is the rate of return that investors require to invest in a particular security, and the increase in transaction costs will decrease the net proceeds that issuers receive from selling securities. Therefore, issuers will need to offer a higher rate of return to compensate investors for the increased transaction costs, which will increase the cost of capital.

Due to Changes in Regulatory Requirements,the Transactions Costs Associated with Selling