Which of the following is true?
A) Companies can raise common equity only by issuing new shares of common stock.
B) There is no opportunity cost associated with use of retained earnings as a source of common equity.
C) Most large mature firms issue new shares of common stock on a regular basis.
D) Companies can raise common equity by issuing new shares of common stock and through retained earnings.

Question

Quizplus · Accepted Answer

Companies can raise common equity by issuing new shares of common stock as well as retaining earnings from previous profits. Both these methods result in an increase in the common equity of the firm. Option A is incorrect because companies can also raise common equity by retaining earnings. Option B is incorrect because the opportunity cost of using retained earnings is the return shareholders could have earned if the company had paid out those earnings as dividends or used them for other investments. Option C is incorrect because most large mature firms do not issue new shares of common stock on a regular basis as they have already established a strong presence in the market and have resources to fund their operations from retained earnings.

Which of the Following Is True