The cost of new common stock financing is higher than the cost of retained earnings due to ________.
A) flotation costs and underpricing
B) flotation costs and overpricing
C) flotation costs and commission costs
D) commission costs and overpricing

Question

Quizplus · Accepted Answer

Flotation costs and underpricing are additional expenses associated with issuing new common stock that are not present when retaining earnings. Flotation costs include fees for investment bankers, lawyers, and other professionals involved in the issuance, as well as expenses related to marketing and selling the shares. Underpricing refers to a situation where the price of the stock is set lower than its true market value in order to ensure a successful sale, leading to a lower return for investors and a higher cost of capital for the company.

The Cost of New Common Stock Financing Is Higher Than