- CFA Exams
- CFA Level I Exam
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 7. Flotation Costs
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. |