flotation costs

(noun)

Costs paid by a firm for the issuance of new stocks or bonds.

Related Terms

Examples of flotation costs in the following topics:

  • Common and Preferred Stock

    • If a company's stock currently sells for 40 a share, expects to pay a dividend of 2 next year, is subject to flotation costs of 10%, and expects to maintain a growth rate of 10%, the cost of newly issued common stock = 2/[40(1-.10)] + .1 = 14.5%
    • There are capital costs associated with equity financing, including accounting and legal costs, as well as underwriting and filing fees.
    • For new issues of stocks, there are flotation costs that must be taken into consideration before choosing equity as a method of long-term financing.
    • Cost of preferred stock = Next dividend to be paid/[Current market value(1-flotation costs)]Cost of newly issued common stock = Next dividend to be paid/Current market value(1-flotation cost) + projected growth rate.

  • Dividend Irrelevance Theory

    • Firm's cost of equity is not affected in any way by distribution of income between dividend and retained earnings.

  • Flotation

    • This is often called the "principle of flotation" where a floating object displaces a weight of fluid equal to its own weight.

  • Average and Marginal Cost

    • Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced.
    • Marginal cost is not related to fixed costs.
    • When the average cost declines, the marginal cost is less than the average cost.
    • When the average cost increases, the marginal cost is greater than the average cost.
    • This graph is a cost curve that shows the average total cost, marginal cost, and marginal revenue.

  • Types of Costs

    • In economics, the total cost (TC) is the total economic cost of production.
    • It consists of variable costs and fixed costs.
    • Total cost is the total opportunity cost of each factor of production as part of its fixed or variable costs .
    • Variable costs are also the sum of marginal costs over all of the units produced (referred to as normal costs).
    • Economic cost is the sum of all the variable and fixed costs (also called accounting cost) plus opportunity costs.

  • Economic Costs

    • An example of economic cost would be the cost of attending college.
    • So, the economic cost of college is the accounting cost plus the opportunity cost.
    • So, the economic cost of college is the accounting cost plus the opportunity cost.
    • Total cost (TC): total cost equals total fixed cost plus total variable costs (TC = TFC + TVC) .
    • Variable cost (VC): the cost paid to the variable input.

  • Cost-Based Pricing

    • Cost-based pricing is the act of pricing based on what it costs a company to make a product.
    • Cost-based pricing is the act of pricing based on what it costs a company to make a product.
    • Price = (1+ Percent Markup)(Unit Variable Cost + Average FixedCost) .
    • A company must know its costs.
    • Cost-based pricing is misplaced in industries where there are high fixed costs and near-zero marginal costs.

  • Cost of capital

    • The cost of capital refers to the cost of the money used to pay for the capital.
    • In order to determine a company's cost of capital, the cost of debt and the cost of equity must be calculated.
    • This determines the "market" cost of equity.
    • One way of combining the cost of debt and equity to generate a single cost of capital number is through the weighted-average cost of capital (WACC).
    • The cost of capital is the cost of the money used to finance the plant.

  • The Supply Curve in Perfect Competition

    • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
    • In economics, a cost curve is a graph that shows the costs of production as a function of total quantity produced.
    • In a free market economy, firms use cost curves to find the optimal point of production (minimizing cost).
    • There are two ways in which cost curves can be used to find profit maximizing quantities: the total revenue-total cost perspective and the marginal revenue-marginal cost perspective.
    • The total revenue-total cost perspective recognizes that profit is equal to the total revenue (TR) minus the total cost (TC).

  • Information Costs and Bond Prices

    • Information costs influence the bond prices and interest rates.
    • We include these costs in the bond's market price and interest rate, and they raise the cost of borrowing.
    • Investors pay a greater cost to acquire information for the high information cost bonds.
    • Thus, investors are attracted to the low-information cost bonds, boosting their demand for low information cost bonds, increasing the market price and decreasing market interest rate.
    • Therefore, low-information-cost bonds pay a lower interest rate.