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What are Issue Costs in Corporate Finance?
Issue costs are one-time costs that are incurred while raising funds by debt and equity financing for a project. As the name suggests, every company needs to spend money while issuing securities in the stock exchange. It is incurred while offering the IPOs or raising debt from the market through issuance of securities. Although the issue costs are not ongoing, it may be a significant amount and hence must be accounted for in the Adjusted Present Value (APV) method of evaluation of a project.
In legal terms, issue costs may be attached to any kind of cost that is incurred while distributing the securities in the market, such as printing, advertising, and legal costs. Usually, the cost is included in APV method because for a large organization, it may be palpable not to ignore from the basics of the financial discipline.
There is no way to adjust issue costs in the measurement of WACC and the opportunity cost of capital. WACC and opportunity costs are usually large enough where the issue costs cannot be accounted for. That is why, the issue costs are calculated individually in the Adjusted Present Value method.
Issue costs usually occur at the beginning of the project and they are adjusted in APV at the start of evaluation of the process. Issue costs reduce the value of APV because they have to be subtracted from the original cash flow that occurs during the project. Although issue costs are not high enough in most cases, they may be high enough in case the companies need to offer costlier materials and tools to the investors and debtors.
Although issue costs are directly related to equity financing, they may be considered in case of debt-financing too. In case of equity financing, the expenses may be connected to physical documents, while the cost in the case of debt-financing may be intangible. Whatever the way of issuance, the costs related to a project should be documented well and so issue costs are an important part of project financing.
In most of the countries, issue costs are amortized over the term of the related debt. Therefore, issue costs are somehow treated like depreciation in accounting. That is why, it is an important part of the accounting process and it affects the capital structure of an organization.
A company seeking to issue securities must plan for issue costs before the actual issuance of the securities because any mismanagement in terms of costs as well as distribution can lead to a big mess in the very beginning of a project.
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