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

question 30

True/False

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.

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Definitions:

Absorption Costing

A bookkeeping approach that incorporates every manufacturing expense, both steady and fluctuating, into the product's total cost.

Net Operating Income

The profit generated from a company's everyday business operations, excluding expenses and taxes.

Fixed Manufacturing Overhead

The total of all costs that remain constant regardless of the level of production, including expenses such as rent, utilities, and salaries of permanent staff in a manufacturing setting.

Variable Costing

An accounting method that only includes variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs, excluding fixed overhead costs.