Financial Management: Principles and Applications, 13/e

14.6 Flotation Costs and Project NPV

When firms raise money to finance new investments by selling bonds and stock, they incur flotation costs—the fees paid to an investment banker and the costs incurred when securities are sold at a discount to the current market price. When new securities are issued, they are often sold for a price slightly below the prevailing market price as an enticement for new investors to purchase them.

WACC, Flotation Costs, and the NPV

Naples Distribution Company is considering an opportunity to expand its distribution business to the southeastern part of the United States. The expansion is expected to generate after-tax cash flows of $5.5 million per year in perpetuity (which means the company expects to earn $5.5 million ...