Suppose a New Project Was Going to Be Financed Partially

question 69

Multiple Choice

Suppose a new project was going to be financed partially with retained earnings. What flotation costs should you use for retained earnings?

• A) use the same flotation cost that would be used to issue new common stock
• B) use an average of the flotation costs for debt, preferred and common stock
• C) use the industry average flotation cost for common stock
• D) zero

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Definitions:

Dividends

Dividends are payments made by a corporation to its shareholder members, representing a portion of the corporate profits distributed.

Dividend-payout Ratio

The percentage of net income paid to shareholders in the form of dividends.

Share Price

The price of a single share of a number of saleable stocks of a company, derivative, or other financial asset.

Plowback Ratio

Plowback Ratio, also known as the retention ratio, is the proportion of earnings that a company retains and reinvests in its operations, rather than distributing as dividends.