The cost of equity capital from the sale of new common stock (re) is generally equal to the cost of equity capital from retention of earnings (rs), divided by one minus the flotation cost as a percentage of sales price (1 - F).

Question

Quizplus · Accepted Answer

The cost of equity capital from the sale of new common stock (re) is generally higher than the cost of equity capital from retention of earnings (rs), due to the additional flotation costs associated with issuing new shares. Therefore, the formula provided is incorrect. The correct formula would be: re = rs (1 - F) where F is the flotation cost as a percentage of sales price.

The Cost of Equity Capital from the Sale of New