Definition of 'Flotation Cost'
The underwriting fee is typically a percentage of the total amount of money raised by the offering. The size of the fee will depend on a number of factors, such as the company's credit rating, the size of the offering, and the current market conditions.
Other costs associated with a stock offering can include legal fees, printing costs, and taxes. Legal fees are typically paid to the law firm that helps the company prepare the registration statement and other legal documents. Printing costs are incurred for printing the prospectus and other marketing materials. Taxes may be due on the sale of the shares, depending on the company's tax status.
The total flotation cost can be a significant expense for a company, especially if it is issuing a large number of shares. For this reason, it is important for companies to carefully consider the costs and benefits of issuing new shares before they do so.
In addition to the direct costs of issuing new shares, there are also a number of indirect costs that companies should consider. For example, issuing new shares can dilute the ownership of existing shareholders. This can lead to a decrease in the stock price, as well as a decrease in the company's earnings per share.
Companies should also consider the impact of issuing new shares on their debt ratios. Issuing new shares can increase a company's debt-to-equity ratio, which can make it more difficult for the company to borrow money in the future.
For all of these reasons, it is important for companies to carefully consider the costs and benefits of issuing new shares before they do so.
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