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Flotation Cost Formula:
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Flotation cost refers to the costs incurred when a company issues new securities. These costs include underwriting fees, legal fees, registration fees, and other expenses associated with the issuance process. Flotation cost is calculated as a percentage of the issue amount.
The calculator uses the flotation cost formula:
Where:
Explanation: The flotation cost represents the total expenses incurred as a percentage of the total capital raised through the security issuance.
Details: Accurate flotation cost calculation is crucial for determining the net proceeds from security issuance, evaluating the true cost of capital, and making informed financing decisions.
Tips: Enter the flotation cost percentage and the total issue amount. Both values must be non-negative numbers.
Q1: What does flotation cost include?
A: Flotation costs typically include underwriting fees, legal expenses, registration fees, accounting fees, and other administrative costs associated with issuing new securities.
Q2: How is flotation cost expressed?
A: Flotation cost is typically expressed as a percentage of the total issue amount, representing the proportion of capital raised that is consumed by issuance costs.
Q3: Why is flotation cost important in capital budgeting?
A: Flotation cost increases the effective cost of capital and must be considered when evaluating investment projects to ensure accurate cost of capital calculations.
Q4: Do flotation costs vary by type of security?
A: Yes, flotation costs typically vary, with equity issues generally having higher flotation costs than debt issues due to greater underwriting and marketing expenses.
Q5: How can companies minimize flotation costs?
A: Companies can minimize flotation costs through competitive bidding among underwriters, shelf registrations, and careful planning of the issuance process.