Why Does a New Issue of Common Stock Have a Higher

question 85

Multiple Choice

Why does a new issue of common stock have a higher cost of capital than retained earnings?

• A)New common stock has floatation costs.
• B)Existing common shareholders have seniority over new common shareholders.
• C)New common stock must pay a higher dividend.
• D)Retained earnings pertains to cash which has a zero cost of capital.

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