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Bonus Question 2-7 (static) What are the two major categories of flotation costs? (Select the best choice below.) 1. Underwri
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Answer #1

Issue of securities involves an underwriting spread because the spread is the profit for the underwriter in return for underwriting the issue. Hence, this is a cost of flotation for a security issue.

Issuing costs are flotation costs because a security issue involves several expenses such as legal costs, promotional expenses, statutory fees etc.

Commissions are usually not a flotation cost because there is no broker involved in a security issue. Rather, underwriters are paid a spread.

Taxes are not part of flotation costs because taxes, if any, are part of general expenses, and not flotation costs.

The answer is C - I and II

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