The DDM and CAPM are internally consistent but academics generally favor the

The ddm and capm are internally consistent but

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The DDM and CAPM are internally consistent, but academics generally favor the CAPM and companies seem to use the CAPM more consistently. This may be due to the measurement error associated with estimating company growth. g P R D 1
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49 Flotation Costs Flotation costs represent the expenses incurred upon the issue, or float, of new bonds or stocks. These are incremental cash flows of the project, which typically reduce the NPV since they increase the initial project cost (i.e., CF 0 ).
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50 Flotation Costs
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51 Example If Spatt is an all equity firm and wants to raise $100M through equity. If flotation cost of equity is 10%, how much equity should Spatt sell? $100 M = (1 0.1) X Amount Raised, so Amount Raised = $100 M / 0.9 = $111.11 M
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52 Example Now if Spatt is financed by 60% equity and 40% debt, and f S =10% as before, and f B = 0.05 The weighted average flotation cost will be: f A = (E/V)* f E + (D/V)* f D = 0.6 * 0.1 + 0.4*0.05 = 0.08 Amount raised will be $100 M / (1-0.08) =$108.70 M
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