Asked by Julia Kochman on May 10, 2024
Verified
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 retained earnings,whose cost is the average return on assets.
Flotation Cost
The total costs that a company faces when it issues new securities, including underwriting fees, legal fees, and registration fees.
Retained Earnings
Cumulative net earnings not distributed as dividends to shareholders, but instead reinvested in the business.
- Discern the factors that affect the expense of capital and the preference for debt or equity financing as a funding strategy.
Verified Answer
CP
Camila PradoMay 16, 2024
Final Answer :
False
Explanation :
Flotation costs are associated with issuing new securities and can apply to both common and preferred stock. Retained earnings are considered a cost-effective source of financing, not because their cost is the average return on assets, but because they do not involve direct issuance costs and are internally generated.
Learning Objectives
- Discern the factors that affect the expense of capital and the preference for debt or equity financing as a funding strategy.
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