The DDM and CAPM are internally consistent, butacademicsgenerallyfavortheCAPMandcompaniesseemtousetheCAPMmoreconsistently.This may be due to the measurement error associatedwith estimating company growth.gPRD1
49Flotation CostsFlotation costs represent theexpenses incurred upon the issue, orfloat, of new bonds or stocks.These are incremental cash flows ofthe project, which typically reducethe NPV since they increase the initialproject cost (i.e., CF0).
51ExampleIf Spatt is an all equity firm andwants to raise $100M throughequity. If flotation cost of equity is10%, how much equity should Spattsell?$100 M = (1–0.1) X AmountRaised, so Amount Raised = $100 M/ 0.9 = $111.11 M
52ExampleNow if Spatt is financed by 60% equity and40% debt, and fS=10% as before, and fB=0.05The weighted average flotation cost will be:fA= (E/V)* fE+ (D/V)* fD= 0.6 * 0.1 + 0.4*0.05= 0.08Amount raised will be $100 M / (1-0.08)=$108.70 M