Question

Due to flotation costs, once firms get beyond the startup stage, they normally obtain all of their new equity by issuing new common stock.

True

False

Answer 1

This statement is false

Floatation costs are the costs which is incurred by a public company when it raises capital from the market. Floatation cost is the expenditure incurred in the form of legal fees, underwriting fees and any other type of expense which is incurred in the course of raising money.

When a company raises money by issuing common stock certain floatation costs is incurred. Any new issue of capital from the market involves expending money in the form of floatation costs.

Hence, it's not due to floatation costs that once a firm which has crossed the startup stage will obtain all of their new equity by issuing new common stock. The floatation costs rather reduces the quantam of capital raised from the market.