When a Firm Has Flotation Costs Equal to 7 Percent

question 84

Multiple Choice

When a firm has flotation costs equal to 7 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 1.07.
• B)increase the project's discount rate to offset these expenses by dividing the firm's WACC by (1 - 0.07).
• C)add 7 percent to the firm's WACC to get the discount rate for the project.
• D)increase the initial project cost by multiplying that cost by 1.07.
• E)increase the initial project cost by dividing that cost by (1 - 0.07).

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Definitions:

Diminishing Marginal Utility

The economic principle stating that as a person consumes more of a good, the additional satisfaction gained from each additional unit of that good decreases.

Risk-Averse

A condition where an individual prefers outcomes with known probabilities over outcomes with unknown probabilities, typically avoiding higher risk.

Total Utility

The cumulative satisfaction or pleasure derived by a consumer from consuming a given amount of goods or services.

Income Fall

A decrease in the amount of money received by an individual, household, or entity, typically referring to earnings over a certain period.