CFA Practice Question

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CFA Practice Question

The component cost of newly issued capital differs from the component cost of retained earnings in the following way:
A. The bond + premium approach doesn't work for new capital.
B. Newly issued capital is usually issued at a lower par value than that of older existing common stock.
C. Flotation costs are subtracted from the price received (P) in the calculation of (k).
Explanation: The flotation costs of issuing common stocks may be substantial, so they must be accounted for in the WACC.

User Contributed Comments 2

User Comment
thekid Flotation cost = fees charged ('F')
re = D1/(P0 - F) + g
something Read in the book, that floatation cost shouldn't be factored into the equity cost of capital, instead should be part of the initial capital outlay.
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