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Questions and Answers
What are flotation costs?
Cost we would incur if we issued debt/equity
Cost occurring at the beginning of issues, so this amount is ___?
Incorporated into the amount that needs to be raised
What do investment banks earn as a percent of funds raised?
Flotation costs
Flotation Cost Equation is ___?
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What is the calculation needed to raise to get the amount needed?
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Study Notes
Flotation Costs Overview
- Flotation costs represent the expenses incurred when issuing debt or equity.
- These costs are crucial to consider in financial planning and capital raising.
Incorporation of Flotation Costs
- Flotation costs must be included in the total amount that needs to be raised for a project.
- These costs occur upfront during the issuance process, impacting initial funding calculations.
Earnings from Flotation Costs
- Investment banks typically earn a percentage of the funds raised through flotation.
- This percentage represents their fee for facilitating the issuance of equity or debt.
Flotation Cost Calculation
- The flotation cost can be calculated using the formula:
- Flotation Costs = Some percent * Amount raised.
- Understanding this equation is essential for evaluating the overall costs of raising capital.
Amounts Needed for Capital Raising
- The formula to determine the amount to be raised, considering flotation costs, is:
- Amount raised = Amount needed / (1 - FC).
- This calculation helps determine the necessary capital while factoring in flotation expenses.
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Description
Explore the essential concepts of flotation costs with these flashcards. Each card introduces key terms and definitions related to the costs incurred when issuing debt or equity. Perfect for finance students looking to strengthen their understanding of this important topic.
