When a firm has flotation costs equal to 7 percent of the funding need, project

ID: 2654783 • Letter: W

Question

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).

The correct answer is option E

Increase the initial project cost by dividing that cost by (1 - 0.07).

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