Floatation Cost

The cost involved in selling a new security issue. It is nothing but the total cost that the company have to bear in order to successfully sell its new security in the primary market. The various costs that are included in this are,

• Charges of under writing spread. These are the charges that are paid to the under writers. Under writers are those who take effects to sell the security in the market. If they are not able to sell the security in the market, then they will buy those unsold security.
• The legal fees that is associated with selling of security. The fees that are to be paid to government and the stock exchange in order to successfully sell the security to the investor.
• The commission fee that must be paid to the broker. Broker plays a major role in the selling of security. They act as mediation between the investor and the selling company. They must be given proper commission in order to sell the security in the market; else they won’t show proper interest in selling those shares which will have huge impact in the sales of security to the investor.
• The fee that must be paid to the investment banker. Investment bankers are the one who takes care of the complete process of initial public offering. The investment banker knows the inside out of the initial public offering process. They will help the company to successfully roll out the initial public offering.
• Cost related to the printing of certificate. The legal document issued as a proof of ownership of the security.
• The cost related to the administrative work. This cost includes the manpower cost that is required to complete the entire process of initial public offering.
• The fee related to listing of the stock in the market.

There are several ways to calculate this cost, but the most widely used method is to calculate the cash outflow during the initial public offering. Floatation cost is a cost that the company incurs before raising fund through initial public offering. Floatation cost will be balanced by the fund raised by the IPO as soon as the process got over.