Question

Explain the following as factor affecting the choice of capital structure:

Floatation costs

Answer 1

1. When a business generates money by issuing securities, it faces flotation charges, which include underwriting, legal, and registration fees.
2. These expenses have a big impact on the capital structure decision.
3. The business may decide to use a smaller percentage of a certain funding source in its capital structure in order to save costs if the flotation costs of that funding type, such as issuing shares, are high.
4. On the other hand, sources that have lower flotation costs might be more appealing.