The cost of newly issued common stock is greater than the current cost common equity because of

Question

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The cost of newly issued common stock is greater than the current cost of common equity because of flotation costs, which refer to the fees paid to investment bankers, underwriters, and other professionals involved in the issuance of new securities. These costs can include legal and accounting fees, printing costs, and commissions, among others. These costs are not present when calculating the current cost of common equity, which is based on the current market price of the stock and the expected rate of return. Capital gains taxes on retained earnings and newly issued common stock do not directly affect the cost of equity, but they can affect the after-tax return that investors receive.

The Cost of Newly Issued Common Stock Is Greater Than