Question

1- Recent IPOs (including Dropbox and Spotify) highlight flotations costs. Carefully define flotation costs and describe their purpose, specifically pertaining to IPOs

Answer 1

Answer:

Flotation cost is the total cost incurred by the company in bringing an IPO or offering the securities in the market or to the public. It includes cost of underwriting, legal expenses, various registration fees etc. While offering the securities to the public, a huge consideration is made for these flotation costs. It may not be economical or feasible for a company to launch securities in the market due to huge amount of flotation costs associated with it.

The purpose of flotation costs is to help the company to analyze and evaluate the various options it has to offer securities. It defines the impact of the such offerings on the cost of capital of the company. The cost of capital has a huge impact on the return of the company from its investment. It also helps the investors to evaluate the proposal that whether a security will be profitable in the long-run or not.

When it comes to IPO, the flotation costs help to decide the company structure, type of security to be issued or the timing and price of the security to be offered to the public. It helps to choose the best alternative available for making an offer to.