Financing with new common stock is generally more costly than financing with retained earnings due to increasing tax rates.

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Financing with new common stock is generally more costly than financing with retained earnings since retained earnings do not require any external financing, whereas the issuance of new common stock incurs flotation costs, such as underwriting and legal fees. Tax rates do not have a direct impact on the cost of financing with equity.

Financing with New Common Stock Is Generally More Costly Than