University of Central Florida (UCF) FIN3403 Business Finance Practice Exam 3

Flotation costs refer to the expenses incurred when a company issues new securities, including stocks or bonds. These costs can include underwriting fees, legal expenses, and other charges directly associated with the issuance process. Adjusting for flotation costs is important because they impact the overall cost of capital and financial decision-making for a company.

When new securities are issued, the company must ensure that it accurately accounts for the flotation costs in its calculations of the net proceeds from the issuance. If these costs are not adjusted for, the company might overestimate the funds available for projects or operations, leading to poor financial decisions. Therefore, recognizing and adjusting for the costs associated with issuing new bonds is critical for maintaining a realistic financial outlook when raising capital in the markets.

This understanding of flotation costs is essential for effectively managing capital structure and making informed investment decisions.