When determining the cost of bond financing a firm must determine the net proceeds from the sale of the bond less the flotation cost charged by the investment banker to estimate the yield-to-maturity.

Question

Quizplus · Accepted Answer

This statement is true. The flotation cost is a cost incurred by the firm to sell the bonds and must be subtracted from the net proceeds to determine the actual amount received by the firm. The yield-to-maturity is then calculated using this adjusted amount to estimate the cost of bond financing.

When Determining the Cost of Bond Financing a Firm Must