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:

In The Money

A term referring to an option contract that has intrinsic value. For call options, this means the underlying asset price is above the strike price, and for put options, it means the underlying asset price is below the strike price.

Call

A stock market option that gives the holder the right to buy shares at a specified price within a specific time period.

Put

A financial contract giving the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price within a specified time frame.

Conversion Value

The financial value of converting a convertible security, like a convertible bond, into its underlying equity at the current market price.