Certified Valuation Analyst (CVA) Practice Exam

How can flotation costs be best described?

1. Costs associated with increasing shareholder value

2. Costs incurred when establishing a business

3. Costs associated with taking a closely held business public

4. Costs related to employee training programs

The correct answer is: Costs associated with taking a closely held business public

Flotation costs are primarily the expenses that arise when a company issues new equity to the public, typically through an initial public offering (IPO). These costs include underwriting fees, legal expenses, registration fees, and other associated costs necessary to facilitate the new issuance of stock in the market. When a closely held business decides to go public, it incurs flotation costs specifically to cover the various expenses involved in the public offering process. This makes understanding flotation costs critical for valuing a business as it transitions from being privately held to publicly traded, and these costs can significantly impact the overall capital raised during the offering. In the context of the other options, while costs associated with increasing shareholder value and costs incurred when establishing a business are relevant to overall business operations, they do not specifically pertain to the act of taking a company public. Similarly, costs related to employee training programs are important for business development but are entirely separate from the financial implications of issuing public equity.