Flotation Costs Flashcards

Flotation Costs Overview

• Flotation costs represent the expenses incurred when issuing debt or equity.
• These costs are crucial to consider in financial planning and capital raising.

Incorporation of Flotation Costs

• Flotation costs must be included in the total amount that needs to be raised for a project.
• These costs occur upfront during the issuance process, impacting initial funding calculations.

Earnings from Flotation Costs

• Investment banks typically earn a percentage of the funds raised through flotation.
• This percentage represents their fee for facilitating the issuance of equity or debt.

Flotation Cost Calculation

• The flotation cost can be calculated using the formula:
  • Flotation Costs = Some percent * Amount raised.
• Understanding this equation is essential for evaluating the overall costs of raising capital.

Amounts Needed for Capital Raising

• The formula to determine the amount to be raised, considering flotation costs, is:
  • Amount raised = Amount needed / (1 - FC).
• This calculation helps determine the necessary capital while factoring in flotation expenses.