Flotation costs

Definition

Flotation costs are the expenses incurred by a company when it issues new securities. These costs include underwriting fees, legal fees, and registration fees associated with the public offering of stocks or bonds.

5 Must Know Facts For Your Next Test

1. Flotation costs can significantly affect a company's cost of raising capital.
2. These costs typically range between 2% to 8% of the total value of the securities issued.
3. Flotation costs must be considered when evaluating the net proceeds from issuing new securities.
4. They can be divided into direct costs (e.g., underwriting fees) and indirect costs (e.g., market impact).
5. High flotation costs may discourage companies from issuing new equity and instead seek alternative funding sources.

Review Questions

• What are flotation costs and what do they include?
• How do flotation costs impact a company's cost of raising capital?
• Why might high flotation costs deter a company from issuing new equity?

Related terms

Underwriting Fees: The compensation paid to financial intermediaries for their role in assisting with the issuance of new securities.

Initial Public Offering (IPO): The process through which a private company becomes publicly traded by offering its shares to the public for the first time.

Cost of Capital: The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile.