The flotation cost for a company is computed as:

Question

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Question restatement: The flotation cost for a company is computed as: 
Options:
1) the arithmetic average of the flotation costs of both debt and equity.
2) the weighted average of the flotation costs associated with each form of financing.
3) the geometric average of the flotation costs associated with each form of financing.
4) one-half of the flotation cost of debt plus one-half of the flotation cost of equity.
5) a weighted average based on the book values of the company's outstanding securities.

Analysis of each option:
Option 1: 'the arithmetic average of the flotation costs of both debt and equity.' This ignores the relative importance or quantity of each financing source in the capital structure. If the company uses more debt than equity (or vice versa), arithmetic averaging treats them as equal factors, which misstates the overall cost impact. So, this is not the standard method.

Option 2: 'the weighted average of the flotation costs associated with each form of financing.' This aligns with the typical definition of flotation cost when a firm has multiple sources of financing. The weighting reflects the proportion of each financing type in the overall capital mix (often by market value or target weights). This approach captures the relative significance of debt and equity costs in the firm's funding.

Option 3: 'the geometric average of the flotation costs associated with each form of financing.' The geometric mean is unusual for combining costs because flotation costs are additive in nature with respect to net funds raised, and the geometric mean does not reflect the straightforward cost-per-dollar raised. This makes it an inappropriate method for this context.

Option 4: 'one-half of the flotation cost of debt plus one-half of the flotation cost of equity.' This implies equal weighting regardless of the actual proportion of each financing source in the capital structure, which typically varies by firm and over time. Unless the firm explicitly adopts a 50/50 financing mix, this is an incorrect simplification.

Option 5: 'a weighted average based on the book values of the company's outstanding securities.' Using book values as weights is generally discouraged for flotation cost calculations because flotation costs are tied to the actual market financing amounts raised, not the accounting book values of existing securities. Market weights or target weights are preferred to reflect funding activities, not historical accounting figures.

Putting the reasoning together: The core idea is to reflect how much each financing source contributes to the total funds raised when the firm incurs flotation costs. Only the weighted average by the relevant financing proportions (market or target weights) correctly represents this combined cost. The arithmetic average ignores weights, the geometric mean is not appropriate for additive flotation costs, the equal split ignores actual mix, and using book values misaligns with financing activity and market-based costs.

FIN331101 Homework 2

The flotation cost for a company is computed as:

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FIN*3311*01 Homework 2

The flotation cost for a company is computed as:

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类似问题

In a consumer society, many adults channel creativity into buying things

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希望你的学习变得更简单

FIN331101 Homework 2