Firms often offer shareholders the option of receiving new shares instead of cash dividends. Such a plan has the advantage of raising new equity without incurring flotation costs.

Question

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By offering new shares instead of cash dividends, the firm can issue new equity without incurring the usual fees associated with a public offering, such as underwriting costs and legal fees. This can be a cost-effective way for the firm to raise new capital.

Firms Often Offer Shareholders the Option of Receiving New Shares