What are flotation costs?

Flotation costs refer to the expenses incurred by a company when it issues new securities to the public, which primarily includes stocks and bonds. These costs are associated with various activities necessary to bring the new securities to market, such as underwriting fees, legal fees, registration fees, and other related administrative costs.

When a company decides to issue new bonds, it must pay underwriting and selling fees, which are considered flotation costs. These costs can significantly influence the overall cost of raising capital as they are directly taken from the amount of funds the company aims to raise. In the case of bond issuance, they may also include costs related to promotional efforts to attract investors.

Recognizing flotation costs is essential for financial managers when making decisions related to financing and investment, as these costs can affect the net proceeds from the issuance.