Flotation costs for a levered firm should:
A)be ignored when analyzing a project because they are not an actual project cost.
B)be spread over the life of a project thereby reducing the cash flows for each year of the project.
C)only be considered when two projects are mutually exclusive.
D)be weighted and included in the initial cash flow.
E)be totally ignored when internal equity funding is utilized.

Question

Quizplus · Accepted Answer

Flotation costs are the costs associated with issuing new securities such as stocks and bonds. These costs are a real cost to the firm and should be included in the initial cash flow because they are necessary to raise capital. Therefore, option D is the best choice because it states that flotation costs should be weighted and included in the initial cash flow.

Flotation Costs for a Levered Firm Should