The flotation cost for a firm is computed as:
A)the arithmetic average of the flotation costs of both debt and equity.
B)the weighted average of the flotation costs associated with each form of financing.
C)the geometric average of the flotation costs associated with each form of financing.
D)one-half of the flotation cost of debt plus one-half of the flotation cost of equity.
E)a weighted average based on the book values of the firm's debt and equity.

Question

Quizplus · Accepted Answer

The most accurate way to calculate the flotation cost for a firm is to take a weighted average of the flotation costs associated with each form of financing, based on the proportion of each type of financing used by the firm. This is because the costs of issuing each type of security may differ, and each type may be used in different proportions depending on the firm's capital structure and financing needs. Therefore, choice B, which advocates for a weighted average, is the correct answer.

The Flotation Cost for a Firm Is Computed As