Question

When a firm has flotation costs equal to 6.8 percent of the funding need, project analysts should:_________

a. Increase the project's discount rate to offset these expenses by multiplying the firm's WACC by 1.068.
b. Increase the project's discount rate to offset these expenses by dividing the firm's WACC by (1 - .068).
c. Add 6.8 percent to the firm's WACC to determine the discount rate for the project.
d. Increase the initial project cost by multiplying that cost by 1.068.
e. Increase the initial project cost by dividing that cost by (1 - .068).

Answer 1

Answer: E. increase the initial project cost by dividing that cost by (1 - .068).

Step-by-step explanation:

Flotation costs simply refers to the costs that are incurred when new security issues are being brought to the market.

When a firm has flotation costs which is equal to 6.8% of the funding need, the project analysts should then increase the initial project cost by dividing that cost by (1 - .068).