The cost of external equity capital is greater than the cost of retained earnings because of
A) flotation costs on new equity.
B) increasing marginal tax rates.
C) higher dividends.
D) greater risk for shareholders.

Question

Quizplus · Accepted Answer

The cost of external equity capital is greater than the cost of retained earnings because of flotation costs on new equity. Flotation costs refer to the expenses incurred by a company in issuing new securities. These costs can include underwriting fees, legal and accounting fees, and other expenses. The additional cost of external equity capital is due to these flotation costs, which make raising capital through issuing new equity more expensive than retaining earnings.

The Cost of External Equity Capital Is Greater Than the Cost