Cost of preferred stock formula with flotation costs

Flotation costs are incurred by a publicly traded company when it issues new securities, and includes expenses such as underwriting fees , legal fees and registration fees. Companies must consider the impact these fees will have on how much capital they can raise from a new issue.

Flotation costs, expected return on equity , dividend payments and the percentage of earnings the company expects to retain are all part of the equation to calculate a company's cost of new equity. Some companies prefer issuing bonds or obtaining a loan, especially when interest rates are low. Other companies prefer equity because it does not need to be paid back. That said, there is a significant cost of equity, especially new equity.

The cost of new equity, or newly issued common stock, includes the costs associated with raising new equity, such as investment banking and legal fees.

How to Calculate the Cost of Preferred Stock

The difference between the cost of equity and the cost of new equity is the flotation cost. The flotation cost is a percentage of the issue price and is incorporated into the price with a reduction.

Using these variables, the cost of new equity is calculated with the following equation: The answer is The cost of existing equity is calculated with the following formula: The difference between the cost of new equity and the cost of existing equity is the flotation cost, which is 0.

In other words, the flotation costs increased the cost of the new equity issuance by 0.

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What Is the Formula to Calculate the Cost of Preferred Stock? -- The Motley Fool

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Flotation Cost

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