For a levered firm, flotation costs should

a. be ignored when analyzing a project because they are not an actual project cost.
b. be spread over the life of a project, thereby reducing the cash flows for each year of the project.
c. only be considered when two projects are mutually exclusive.
d. be weighted and included in the initial cash flow.
e. be totally ignored when internal equity funding is utilized.

The answer is option B. For a levered firm, flotation costs should be spread over the life of a project, thereby reducing the cash flows for each year of the project.

Explanation:

When a company’s securities are listed on a public exchange, there is a general saying that securities are floated on the exchange. That is how the name flotation costs came about.

Flotation is actually the costs  incurred by a company in issuing its securities to public.  it is also called issuance costs.

Examples of Flotation costs include charges paid to the investment bankers, lawyers, accountants, registration fees of the securities regulator and the exchange on which the issue is to be listed.

Flotation cost would vary based on several factors, such as company’s size, issue size, issue type (debt vs equity),

In summary, Flotation costs are the cost a company incurs to issue new stock making new equity cost more than existing ones.

Business analysts argue that flotation costs are a one-time expense that should be adjusted out of future cash flows in order to not overstate the cost of capital forever.

It is based on this premise that i chose option B, which states that flotation costs be spread over the life of a project thereby reducing the cash flows for each year of the project at levered firms.

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