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Why do you deduct or subtract 1 to flotation cost? Example: Given; Annual dividend (D) = $4.75 Flotation cost (F) = 0.05 or 5% Number of shares issued (N) = 10,000 Stock price (P0) = $50

Why do you deduct or subtract 1 to flotation cost? Example: Given; Annual dividend (D) = $4.75 Flotation cost (F) = 0.05 or 5% Number of shares issued (N) = 10,000 Stock price (P0) = $50

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter11: Determining The Cost Of Capital
Section: Chapter Questions
Problem 13P: The Cost of Equity and Flotation Costs Messman Manufacturing will issue common stock to the public...
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Why do you deduct or subtract 1 to flotation cost?

Example:

Given; 

  • Annual dividend (D) = $4.75
  • Flotation cost (F) = 0.05 or 5%
  • Number of shares issued (N) = 10,000
  • Stock price (P0) = $50

 

Formula;

Total value able to receive = N * P0 * (1 - F)

 

Total value able to receive = 10,000 * $50 * (1 - 0.05)

Total value able to receive = $500,000 * 0.95

Total value able to receive = $475,000

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