The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock, which has no flotation cost, and reinvested earnings, whose cost is the average return on the assets that are acquired.

Question

Quizplus · Accepted Answer

Flotation costs are associated with issuing new securities, including both common and preferred stock. Preferred stock typically does have flotation costs, though they might differ in magnitude from those of common equity. The decision to use preferred stock, common equity, or reinvested earnings depends on various factors, including cost of capital, financial strategy, and market conditions, not just flotation costs.

The Higher the Firm's Flotation Cost for New Common Equity