Here are some notes on floatation costs and the cost of capital in detail:
- Floatation costs are the costs associated with issuing new securities. These costs can include underwriting fees, legal fees, and printing and registration fees.
- The cost of capital is the minimum return that a company must earn on its investments in order to satisfy its investors. The cost of capital is affected by a number of factors, including the risk of the investment and the cost of debt and equity.
Floatation costs can affect the cost of capital in a number of ways. First, floatation costs can reduce the amount of money that a company raises from issuing new securities. This can increase the cost of capital because the company will have to pay a higher interest rate on the debt or issue more equity in order to raise the same amount of money.
Second, floatation costs can increase the risk of an investment. This is because floatation costs are typically incurred upfront, before the company has any earnings from the investment. This can make the investment more risky because the company will have to pay the floatation costs even if the investment does not generate any earnings.
The impact of floatation costs on the cost of capital will depend on the specific circumstances of the investment. However, in general, floatation costs can increase the cost of capital.
Here are some of the additional things to keep in mind about floatation costs and the cost of capital:
- The amount of floatation costs will vary depending on the type of security that is being issued. For example, the floatation costs for issuing debt are typically lower than the floatation costs for issuing equity.
- The cost of floatation can be significant, especially for small companies. This is because small companies typically have to pay higher underwriting fees.
- The cost of floatation can be reduced by using a shelf registration. A shelf registration allows a company to file a registration statement with the Securities and Exchange Commission (SEC) and then issue securities over a period of time. This can reduce the cost of floatation because the company only has to pay the underwriting fees once.