Flotation costs

Flotation costs are the fees, such as underwriting and legal costs, a firm pays to issue new securities, which raise the effective cost of newly raised capital above its quoted cost.

ByHoang TruongUpdated July 5, 2026

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A firm issuing new shares at €25 each pays 6% in flotation costs, keeping net proceeds of only €23.50. Dividing the expected €1.50 dividend by that €23.50, then adding 4% growth, gives a cost of new equity of 10.38% — higher than the 10% a naive calculation ignoring flotation costs would show.

Where it fits

TopicCost of Capital & WACCAdvancedSubjectCorporate FinanceAdvanced

The formula

LaTeX

r_e = \frac{D_1}{P_0(1-f)} + g

Variables

$r_{e}$: Cost of newly issued equity (decimal)
$D_{1}$: Expected dividend per share next year (€)
$P_{0}$: Current issue price per share (€)
$f$: Flotation cost as a fraction of the issue price (decimal)
$g$: Constant dividend growth rate (decimal)

Gives the effective cost of newly issued equity once flotation costs reduce the net proceeds the firm actually receives per share.