We should expect share flotation costs to be well below the company’s equity. In general, flotation costs may vary depending on the company’s size and what actions will be taken before issuing shares to the public. Flotation costs include legal, underwriting, arranger’s, publishing, and auditing fees. These costs reflect the possible future value of equity after increasing income from shares offered to the public. Logically, these costs cannot exceed (especially exceed significantly) the cost of equity. These costs must be carefully considered so that the company does not suffer losses caused by short-sighted resource management and overestimated opportunities. Unjustified spending on shares before their launch and presentation will reduce the company’s equity (Cornett et al., 2021). Public sentiments and crises of the present and the near future should be considered when creating a table of flotation costs.
Managers should remember that flotation costs are a one-time investment that will not permanently increase the equity cost (or at least several times). If a company issues shares, it pays flotation costs necessarily. Otherwise, the company is looking for other ways to increase the value of equity capital and attract new investments. Every time the company issues new shares, it will be necessary to pay a new flotation cost no matter how often (Cornett et al., 2021). However, such expenses are not spontaneous, as a rule, and can significantly damage the company’s capital. It is advisable for directors and analysts to foresee a possible issue of shares and to pre-set flotation costs. Most likely, they should also carefully clarify how specialists will carry out the audit, how exactly the publishing services will help with the issuance of shares, and whose services these will be.
Reference
Cornett, M. M., Adair, T., & Nofsinger, J. (2021). M: Finance (3rd ed.). New York, NY: McGraw Hill/ Irwin.