I believe I am right, but for the purpose of the test, the best answer should be worded:“the flotation cost should be added to the initial cash outlay when solving for NPV” or “the flotation cost should be deducted from NPV”…this question is worded horribly
Multiply the cap expenditures by the Equity Weight = total Equity. Multiply total equity by floatation cost = Dollar amount of floatation cost add that to cap ex… I am leaning towards B too because C is poorly worded. Floatation costs are not included in calculating cost of financing using CAPM or DDM or DGM. Please tell me this question was not included in a practice?
It is apparently from stalla…i have used schweser and cfai as a reference. My interpretation leads me to B, but apparently others disagree.
Both methods are described in the CFAi text, the one including the flotation costs and the other considering flotation costs a one time event. No clear conclusion as to which to apply though.
map1 Wrote: ------------------------------------------------------- > Both methods are described in the CFAi text, the > one including the flotation costs and the other > considering flotation costs a one time event. No > clear conclusion as to which to apply though. Thats why this question is poorly worded. Including floatation costs in Kce is the incorrect way of handling floatation costs. The correct way is adding the DOLLAR equivalent to the initial cash outflow
kenanadu, both ways are described in the CFAi text. It says that the one with flotation deducted from the price of the stock is not a very good model, but CFAi text doesn’t say not to use it, in fact they even run an example on it and compare the results of both variations.