For those who’ve taken Schweser’s book 6, test 1, AM: did you guys notice that they didn’t factor in flotation costs in Q70? Is that how it’s supposed to be?
yeah i noticed that too, but then i assumed that flotation cost are not part of the cost of common S/H equity since it will be a one time cost when new shares are issued, as such it might be a sunk cost (an issuing cost).
I think that flotation costs are supposed to be factored in the cost of issuing new common equity. Also, A and C are the same, so this question is pretty messed up altogether.
Yep, I spotted the A & C - but from memory the question was asking for the cost of common equity, not the cost of new common equity. Cost of common equity is actually the return required by an investor, not the cost to the issuer, IIRC. (willing to be corrected). Cheers Chris
just had another look at it. You’re right Chris, it does ask about the cost of common equity, not the cost of new common equity. My bad. Thanks for pointing out.