Asked by Brittany Shackelford on May 27, 2024
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Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them,and no flotation costs are required to raise them,but capital raised by selling new common shares or bonds does have a cost.
Retaining Earnings
Profits that a company reinvests in itself instead of paying out to shareholders as dividends.
Flotation Costs
Those costs occurring when a company issues a new security, including fees to an investment banker and legal fees.
New Common Shares
Issuance of additional shares of a company's stock, which can dilute existing shareholders' equity but raise new capital for the company.
- Identify factors affecting the cost of capital and the decision to use debt or equity financing.
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Learning Objectives
- Identify factors affecting the cost of capital and the decision to use debt or equity financing.
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