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

Question

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The statement is incorrect. The cost of equity capital from the sale of new common stock is generally higher than the cost of equity capital from retention of earnings due to the flotation costs (such as underwriting fees, legal fees, and printing costs) associated with issuing new shares. The formula for the cost of equity from the sale of new common stock is r_e = r_s / (1 - F), where F represents the flotation cost as a percentage of sales price.

The Cost of Equity Capital from the Sale of New