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

Question

Quizplus · Accepted Answer

Flotation costs are considered when a firm issues new securities and can affect the choice between financing options, but the decision to use preferred stock or retained earnings over new common equity involves more factors, such as cost of capital, financial structure, and investor expectations, not just flotation costs.

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