- Taking Flotation Costs Into Account Will Reduce The Cost Of New Common Stock O False Flotation Costs Are Additional Co 1 (33.83 KiB) Viewed 15 times
Taking flotation costs into account will reduce the cost of new common stock. O False: Flotation costs are additional costs associated with raising new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost-similar to how the after-tax cost of debt is calculated. White Lion Homebuilders is considering investing in a one-year project that requires an initial investment of $450,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that White Lion expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Alpha Moose Transporters has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $1.36 at the end of the year. The
company's earnings and dividends' growth rate are expected to grow at the constant rate of 9.40 % into the foreseeable future. If Alpha Moose expects to incur flotation costs of 6.50% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be White Lion Homebuilders Co.'s addition to earnings for this year is expected to be $857,000. Its target capital structure consists of 50% debt, 5% preferred, and 45% equity. Determine White Lion Homebuilders's retained earnings breakpoint: O $2,190,111 O $1,904,444 O $2,285,333 O $2,380,555