Flotation Cost

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DEFINITION of 'Flotation Cost'

The costs incurred by a publicly traded company when it issues new securities. Flotation costs are paid by the company that issues the new securities and includes expenses such as underwriting fees, legal fees and registration fees. Companies must consider the impact these fees will have on how much capital they can raise from a new issue.

BREAKING DOWN 'Flotation Cost'

If a company sells its new shares for $50 each and its flotation costs are 5%, it will actually raise $47.50 for each share it sells (50 x 95 cents). Flotation costs, expected return on equity, dividend payments and the percentage of earnings the company expects to retain, are all part of the equation to calculate a company's cost of new equity.

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