The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs when financing projects with retained earnings.

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Retained earnings are profits that a company has kept instead of paying out as dividends to shareholders. Since there are no flotation costs involved in issuing new stock, the cost of retained earnings is always lower than the cost of a new issue of common stock. This is because when a company issues new common stock, it incurs various expenses such as underwriting fees, legal fees, and other related expenses. Therefore, using retained earnings is a more cost-effective way of financing projects than issuing new stock.

The Cost of Retained Earnings Is Always Lower Than the Cost