Flotation Costs

The company often uses the weighted cost of capital to calculate the percent of funding raised through the new equity and the percent through debt.

The cost involved in issuing new equity market value calculation involves legal expenses, audit & accounting fees, investment bank’s share out of the issuance, and the fees involved in listing on the exchange.

The rate depends on the type of securities issue, their size, and the risk associated (the asset class performance) with the transaction.

Flotation costs are related to the process of issuing new stocks in the market that involves multiple stages and participants like hiring investment bankers, lawyers, registrations, drawing prospectus, keeping the disclosures, etc.

It is a percentage of the net proceeds where the cost can be higher for smaller issues or less for larger issues; the relationship depends on the size of the issue and the number of such costs.  

It can be approx. 1 to 2% for debts and less on preferred shares. The rate for common shares can be between 2 to 8%. It can be a percent of the issue price.

Some firms issue bonds or obtain loans, especially, when the interest rate is low. Some others prefer equity as it is not required to be paid back but selling leads to a loss of ownership stake in the firm.