# Understanding Flotation Cost.

Flotation costs are the costs associated with issuing new securities. These costs include underwriting fees, legal fees, and accounting fees. Flotation costs can be a significant expense when a company is issuing new securities, and can have a significant impact on the overall cost of financing a transaction.

Are flotation costs tax deductible? Yes, flotation costs are tax deductible. The Internal Revenue Service (IRS) considers flotation costs to be a capital expenditure, and as such, they can be deducted from a company's taxable income. Flotation costs can include expenses such as underwriting fees, legal and accounting fees, and other costs associated with issuing new equity or debt.

How do you calculate flotation cost adjustment? There are a few different ways to calculate flotation cost adjustment. One common method is to use the following formula:

Flotation cost adjustment = (1 - (1 - flotation costs)) / (1 - flotation costs)

where flotation costs are the costs associated with issuing new shares in a company.

Another method is to use the following formula:

Flotation cost adjustment = (1 + flotation costs) / (1 - flotation costs)

where flotation costs are again the costs associated with issuing new shares in a company.

Both of these formulas give the same result.

#### Does higher flotation costs reduce investor returns and therefore reduce a company's WACC explain your answer?

Yes, higher flotation costs can reduce investor returns and therefore reduce a company's WACC. Flotation costs are the costs associated with the issuance of new equity, and can include things like underwriting fees, legal fees, and accounting fees. All else being equal, a company with higher flotation costs will have a higher WACC than a company with lower flotation costs. This is because the higher flotation costs will reduce the amount of money that investors are willing to pay for the company's equity, and therefore the company will have to offer a higher rate of return (i.e. a higher WACC) to attract investors.

#### How do you calculate weighted average flotation cost?

There are a few steps involved in calculating the weighted average flotation cost:

1. Determine the number of new shares to be issued in the transaction.

2. Multiply the number of new shares by the estimated flotation cost per share.

3. Add the product from Step 2 to the pre-transaction equity market value of the target firm.

4. Divide the sum from Step 3 by the post-transaction equity market value of the target firm.

##### How do flotation cost affect the choice of capital structure of a company?

The floatation costs of a company can have a significant impact on the choice of its capital structure. The floatation costs are the costs associated with the issuance of new equity, which can include the costs of underwriting, printing, and registering the new shares. If a company is considering issuing new equity to finance a merger or acquisition, the floatation costs can make the deal significantly more expensive. As a result, the company may choose to finance the deal with debt instead. This can have implications for the company's capital structure, as the debt-to-equity ratio will increase. The company may also choose to issue new equity to finance a share repurchase, which can have the effect of reducing the floatation costs associated with the repurchase.