-Floatation costs can be ignored in calculating the weighted average cost of capital.
-However, when analyzing the Net Present Value of projects, the weighted floatation cost must be accounted for before a decision is arrived at.
For example,
Let’s say there’s a project which has an initial cost of $1,000,000 and no retained earnings available.
Weighted average floatation cost = Weight of debt*Floatation cost of debt + Wt. of equity * Floatation cost of new equity
= 24% * 10% + 76% * 15% = 13.8% (see above)
Since the project costs 1,000,000 before floatation costs, the cost after including floatation costs would be 1,000,000/(1-.138) = $1,160,093 (assuming there are no
retained earnings available)