Question 3. 3. Which of the following is true of flotation costs? (Points : 1)
They include expenses like investment banker fees and commissions.
They include the underwriting spread.
They tend to raise the cost of capital.
all of the above
In order to determine which statement is true about flotation costs, we need to understand what flotation costs are and how they can affect the cost of capital.
Flotation costs refer to the costs incurred by a company when issuing new securities, such as stocks or bonds, in the market to raise capital. These costs include various expenses like investment banker fees, commissions, legal fees, printing costs, and marketing expenses.
Now, let's evaluate each statement:
1. They include expenses like investment banker fees and commissions: This statement is true. Flotation costs do include expenses like investment banker fees and commissions, as these professionals assist in the process of issuing new securities.
2. They include the underwriting spread: The underwriting spread refers to the difference between the price at which the underwriter purchases the securities from the issuing company and the price at which they sell them to investors. This statement is also true. The underwriting spread forms a part of the flotation costs.
3. They tend to raise the cost of capital: This statement is true as well. Flotation costs can increase the overall cost of capital for a company because the expenses associated with issuing new securities directly impact the funds raised and the return on investment.
Considering the analysis above, the correct answer to the question is "all of the above" since all three statements are true.