In question 2, flotation cost is 4percent of issuance so 40 ×0.04hona chahiye par yaha pe 1-0.04 kyu kiya hai
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According to wrong treatment of flotation, we reduces the price of share by flotation cost. So, share price 40 rs hai to ham usko 4% less kardege.. Ab ya to 40*(1-0.04) yani 40*0.96=38.4 karke le sakte hai…
Ya fir, 40 ka 4% nikal lo aur usko 40 se minus kardo, ajayega 38.4..
isliye upar 1-0.04 kiya hai taki flotation cost adjust ho paye….
Aur logic minus kyu karte hai share price se uska ye hai ki wrong method se cost of equity jada atta hai..isliye denominator kam hoga tabhi resulted value jada ayegi.. Right?
I hope it helps.
Yeah cleared the doubt..thank you 🙂