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Chapters 11 and 12 Assignment A firm will never have to take flotation costs into account when calculating the cost of raising capital from retained earnings True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. False: Flotation costs are additional costs associated with raising new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost-similar to how the after-tax cost of debt is calculated. Green Caterpillar Garden Supplies Inc. is considering a one-year project that requires an initial investment of $550,000; however, in raising this capital, Green Caterpillar will incur an additional flotation cost of 5%. At the end of the year, the project is expected to produce a cash inflow of $715,000. The rate of return that Green Caterpillar expects to earn on the project after its flotation costs are taken into account is Green Caterpillar has a current stock price of $22.35 and is expected to pay a dividend of $2.45 at the end of next year. The company's growth rate is expected to remain constant at 4%. If the issue's flotation costs are expected to equal 5% of the funds raised, the flotation-cost-adjusted cost of the firm's new common stock is Green Caterpillar's addition to earnings for this year is expected to be $420,000. Its target capital structure consists of 35% debt, 5% preferred stock, and 60% common stock. Green Caterpillar Garden Supplies Inc.'s retained earnings breakpoint is (rounded to the nearest whole dollar). Grade it Now Save & Continue 10:47 6/2/2 o W N O