Question

or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of 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. False: Flotation costs are additional costs associated with raising new common stock.

Answer 1

Answer: False: Flotation costs are additional costs associated with raising new common stock.

Explanation:

Floatation costs are indeed an expense associated with issuing new stock which consist of expenses such as legal and underwriting fees.

They increase the cost of common stock because they are taken from common stock. They cannot be compared to debt because debt is an expense so tax reducing it reduces our cost but when the floatation costs are removed from stock, we get less.