In general, it is not possible for re, the cost of new equity, to be lower than rs, the cost of retained earnings.However, an exception to this rule occurs when the share price increases just prior to the firm issuing new equity such that it more than offsets the flotation costs and thus, re becomes less than rs.

Question

Quizplus · Accepted Answer

The cost of new equity (re) typically includes flotation costs, making it higher than the cost of retained earnings (rs), which does not incur such costs. A temporary increase in share price does not change this fundamental cost structure.

In General, It Is Not Possible for Re, the Cost