firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock.

Question

Quizplus · Accepted Answer

The cost of external equity (also known as the cost of new common stock) is generally higher than the required rate of return on outstanding common stock, because new investors require a higher return due to the additional risk they are taking on by investing in a company that they have no prior ownership in.

Firm's Cost of External Equity Raised by Issuing New Stock