A fiRm Is Considering Expanding Its Operations

question 240

Multiple Choice

A firm is considering expanding its operations. The expansion is in the same risk class as existing operations and requires issuance of debt or equity or both. Since flotation costs will be involved,
_______________.

• A) The WACC should be adjusted upward to reflect the flotation costs.
• B) The firm should determine the highest level of flotation costs under the different financing scenarios and incorporate this into the borrowing costs.
• C) The firm should increase the amount of funds needed by an amount equal to the estimated weighted average flotation costs.
• D) The WACC should be adjusted downward.
• E) The firm should decrease the amount of the future cash flows to reflect the level of flotation costs that will be incurred.

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Definitions:

Nucleus

The membrane-bound organelle in eukaryotic cells that contains the genetic material (DNA).

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Chemical substances produced in plants that regulate growth, development, and responses to environmental stimuli.

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Compounds containing carbon that are typically found in living systems, including proteins, lipids, carbohydrates, and nucleic acids.

Alternation of Generations

A lifecycle in certain plants and algae that alternates between a sexual phase (gametophyte) and an asexual phase (sporophyte).