what do flotation costs tell you 
companies raise capital in two ways debt via bonds and loans or equity some companies prefer issuing bonds or obtaining a loan especially when interest rates are low and because the interest paid on many debts is tax deductible while equity returns are not the biggest appeal of equity is that it does not need to be paid back however there are also downsides selling equity entails giving up an ownership stake in the company and the process can be expensive there are flotation costs associated with issuing new equity or newly issued common stock these include costs such as investment banking and legal fees accounting and audit fees and fees paid to a stock exchange to list the company s shares the difference between the cost of existing equity and the cost of new equity is the flotation cost the flotation cost is expressed as a percentage of the issue price and is incorporated into the price of new shares as a reduction it essentially reduces the final price of the issued securities and lowers the amount of capital that a company can raise flotation costs are expressed as a percentage of the issue price a company will often use a weighted average cost of capital wacc calculation to determine what share of its funding should be raised from new equity and what portion from debt flotation cost formulathe equation for calculating the flotation cost of new equity using the dividend growth rate is dividend growth rate d 1 p 1 f g text dividend growth rate frac d 1 p left 1 f right g dividend growth rate p 1 f d1 g