FLOTATION COST Meaning and
Definition
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Flotation cost is a financial term that refers to the cost a company incurs when it raises external capital by issuing new securities, such as stocks or bonds. It represents the fees and expenses associated with the process of issuing new securities in the market to raise funds for the company.
Flotation costs are primarily related to investment banking services and include fees for underwriting, legal and accounting services, printing costs, registration fees, and other administrative expenses. These costs are incurred by a company when it decides to go public or issue new securities in the primary market. The purpose of raising funds through this process is usually to finance expansion and growth initiatives, acquisition activities, debt repayment, or other capital requirements.
Flotation costs are expressed as a percentage of the funds raised through the issuance of new securities. They are typically deducted from the total amount raised, resulting in a net amount available for the company to utilize. The higher the flotation cost, the lower the proceeds for the company to use for its intended purposes.
It is important for companies to consider flotation costs when making financial decisions as they can impact the overall cost of capital and the returns expected by the investors. By taking into account the flotation costs, companies can effectively evaluate the feasibility and profitability of raising external capital and make informed decisions regarding their financing options.
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Etymology of FLOTATION COST
The word "flotation cost" is a term used in finance and refers to the expenses that a company incurs when it issues new securities to raise capital, such as through an initial public offering (IPO).
The etymology of the term can be broken down as follows:
1. Flotation: The term "flotation" in this context is derived from "float" or "floating", which means to raise or invest capital by selling shares of a company's stock to the public. This usage of "float" originates from the idea of the shares being "floating" or traded on the stock market.
2. Cost: The term "cost" refers to the amount of money or resources required to perform a particular action, in this case, the expenses related to issuing new securities.
Therefore, the term "flotation cost" combines these two concepts to describe the financial expenses associated with raising capital through the issuance of new securities.
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