Question

What are flotation costs and why they must be included in the initial cost of a project? Explain in detail.

The differences between the standard deviation and beta in the measurement of risk in the capital market.

Answer 1

Flotation is the cost paid to investment bankers , administrative and regulatory costs incurred in issuing new equity. It increases cost of equity because some part of equity will be used up to pay off the costs. It should be included because it affect cost of equity and hence it increases WACC
Cost of Equity = Dividend next year/Price*(1-flotation cost) + Growth . Higher the flotation cost higher will be the cost of equity.
Hence WACC will be higher due to  higher cost of equity.
WACC = Weight of Equity * Cost of Equity + Weight of Debt * Cost of Debt *(1-Tax Rate)

Standard deviation is the square root of the squares of the deviation from the mean.It is standalone risk which is calculated from historical returns.It includes all risks.
Beta is the covariance of the stock return with market divided by variance of market returns. It shows systematic risk. It helps to identify how returns will not be  affected due to recession and boom,