Assume a leveraged firm plans to raise new capital to finance a project. To prop

ID: 2736992 • Letter: A

Question

Assume a leveraged firm plans to raise new capital to finance a project. To properly account for the flotation costs, the firm should:

A. increase the target weights of both debt and equity to account for the flotation percentage.

B. subtract the pretax flotation cost from the project’s NPV.

C. add the percentage of the flotation cost to the WACC when discounting the cash flows.

D. deduct the amount of the flotation cost from the cash flows for Year 1 of the project.

E. divide the amount of project capital needed by (1 – Weighted average flotation cost)

E. divide the amount of project capital needed by (1 – Weighted average flotation cost)

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