What is Floatation Cost?

Floatation cost is the expenditure incurred when issuing new securities. It is expressed as a percentage of the total issue price. An issuer must subtract all floatation costs from the total issue price, resulting in a reduced amount of funding from any securities issuance. Floatation cost can be quite high as a proportion of the total proceeds from the sale of securities when the proceeds are not expected to be that large. Consequently, issuers have an incentive to issue more securities than are actually necessary, thereby lowering the proportional cost of floatation.

Examples of Floatation Costs

Examples of floatation costs are accounting fees, legal fees, printing fees, registration fees, and the underwriting spread earned by the investment banker.