CandleFocus

Flotation Cost

Candlefocus Editor
Flotation costs have been a topic of debate among corporate analysts for many years. Flotation costs, also known as new issue costs, are defined as the costs associated with the issuance of new securities by a company. This could include direct costs (such as underwriters’ fees and registration fees) and indirect costs (such as costs associated with marketing the securities). These costs are incurred before investors can purchase the security, with the resulting cost being added to the purchase price.

In general, flotation costs can have a significant impact on the cost of a security. This is due to the fact that these costs reduce the proceeds the firm will receive from the sale of securities. As a result, the cost of capital is greater than it otherwise would be due to the deduction of the flotation costs. This issue has been debated among corporate financial analysts for many years.

Some argue that flotation cost should not be included in the cost of capital and should be adjusted out of future cash flows. The argument is that flotation costs represent a one-time cost that should not be included in future cash flows. Another argument is that these costs should be taken into account because they represent an additional expense to the company.

The answer to whether flotation costs should be included in the cost of capital depends on the nature and composition of the new security. In general, if the security is relatively illiquid, it is important to account for the flotation cost when computing the cost of capital. This is because these costs will affect the proceeds the company receives from the sale and should be taken into account. However, if the security is more liquid, the flotation costs may be nominal and can be left out of the calculation.

Overall, it is important for analysts to consider the flotation cost in the calculation of the cost of capital so that the company can properly assess the cost of issuing new securities and make informed decisions. This can help the company determine what type of security they should issue and ensure their decisions are in the best interests of shareholders.

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