Business Finance: Business and Marketing

Business and Marketing
Name
University Question One
In the capital markets, floatation costs are common. These are the fees collected by underwriters and financial intermediaries in exchange for their services with the stock buyers (Gitman & Zutter, 2007). These financial intermediaries work in different financial markets such as stock markets, mortgages markets, and insurance markets. The jobs of financial intermediaries in the different financial markets differ but all charge floatation costs. In the stock markets, intermediaries charge fees for the distribution of financial instruments. In the mortgage markets, intermediaries charge processing fees for the loans. In the case of insurance, intermediaries charge fees for the identification and calculation of financial loss. All these are floatation costs associated with transactions in capital markets.
Floatation costs have the effect of increasing the costs of capital. When a firm raises capital, one of the factors considered by the management is the cost of capital. Since issuance of different financial securities is associated with different floatation costs, cost of capital varies with different forms of capital. In financial structuring of a firm, cost of capital is one of the most important aspects considered and therefore the issue of floatation costs becomes important. Financial intermediaries play a significant role in determining the value of floatation costs and hence the cost of capital. Competition between investment and stockbrokers leads to a decline in the floatation cost and hence the cost of capital. This is because the market forces of demand and supply play a significant role in determining the prices charged by the stockbrokers. When the financial intermediaries are many in the market, stock buyers have more information about the markets and therefore they are charged less as floatation costs. In addition, the pu...