The cost of external equity capital raised by issuing new common stock (r_e) is defined as follows,in words: "The cost of external equity equals the cost of equity capital from retaining earnings (r_s),divided by 1 minus the percentage flotation cost required to sell the new stock (1 - F)."

Question

Quizplus · Accepted Answer

The definition provided in the statement is incorrect. The correct definition is: The cost of external equity capital raised by issuing new common stock (rS1U1B1eS1U1B0) is the cost of newly issued stock (rS1U1B1) adjusted for the flotation costs (F). This adjusted cost is higher than the cost of retained earnings (rS1U1B1sS1U1B0) due to the expenses associated with issuing and selling new shares of stock. Therefore, the cost of external equity capital is typically higher than the cost of internal equity capital (retained earnings).

The Cost of External Equity Capital Raised by Issuing New