Suppose a new project was going to be financed partially with retained earnings.What flotation costs should you use for retained earnings?
A) Use the same flotation cost that would be used to issue new common stock
B) Use an average of the flotation costs for debt, preferred and common stock
C) Use the industry average flotation cost for common stock
D) Zero

Question

Quizplus · Accepted Answer

Flotation costs are the expenses incurred in the process of raising capital, such as fees paid to investment bankers, lawyers and accountants. When financing a new project with retained earnings, there are no flotation costs associated with it since the company is not issuing any new securities. Therefore, the best choice is to use a flotation cost of zero.

Suppose a New Project Was Going to Be Financed Partially