What do flotation costs refer to?

Flotation costs refer to the transaction costs incurred when a company issues new securities, such as stocks or bonds, to raise capital. These costs can include various expenses, such as underwriting fees, legal fees, registration fees, and other direct costs associated with the issuance process. When a company decides to go public or offer new shares, it must account for these flotation costs in its financial planning since they can significantly impact the net proceeds from the capital raised.

Understanding flotation costs is crucial for companies, as they can affect the overall cost of equity or debt financing and influence the decision-making process regarding capital structure and funding strategies. If a company underestimates these costs, it may raise less capital than anticipated, which can have negative implications for its growth and financial stability.