The fact that flotation costs can be significant is an argument for:

1. Issuing larger regular dividends than the industry norm.

2. Maintaining a constant dividend policy even if the firm frequently has to issue new shares.

3. Maintaining a low dividend policy and rarely issuing extra dividends.

4. Maintaining a constant dividend policy even when profits decline significantly.

5. Periodic extra dividend payments.

Question

Business

Tyrell Wilkerson

8 November, 02:35

The fact that flotation costs can be significant is an argument for:

1. Issuing larger regular dividends than the industry norm.

2. Maintaining a constant dividend policy even if the firm frequently has to issue new shares.

3. Maintaining a low dividend policy and rarely issuing extra dividends.

4. Maintaining a constant dividend policy even when profits decline significantly.

5. Periodic extra dividend payments.

+3

Answers (1)

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Kaya Benson · Answer 1

Option 3 Maintaining a low dividend policy and rarely issuing extra dividends.

Explanation:

The reason is that the floating costs is the cost arising as the result of issuing shares on the stock exchange. This floating costs include legal fees, registration and other associated fees. This floating cost is directly proportional to number of shares issued.

This means that if the company requires funds to finance a project and it has now paid dividend. Then the funds required are more than before so the number of shares issued on the stock exchange are higher and the higher the number of shares issued, the higher are the floating cost.