The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock which has no flotation cost and retained earnings whose cost is the average return on assets.

Question

Quizplus · Accepted Answer

Preferred stock typically has flotation costs, and retained earnings do not have a flotation cost but their cost is not the average return on assets; it is the opportunity cost of equity.

The Higher the Firm's Flotation Cost for New Common Equity