New Common Stock Is More Expensive Than Required Rate of Return

question 13

Multiple Choice

New common stock is more expensive than required rate of return (K_e) because new common stock has to

• A) compensate for risk.
• B) compensate for more dividends.
• C) compensate for expansionary problems.
• D) cover distribution costs.

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Definitions:

Optimal Quantity

The quantity that maximizes a firm or individual's net benefit, often determined through cost-benefit analysis.

Marginal Cost

The rise in expense associated with the production of an extra unit of a product or service.

Negative Externalities

The cost that affects a party who did not choose to incur that cost, often associated with production or consumption of goods and services, such as pollution.

Underallocated

Refers to a situation where resources are not enough or not effectively distributed for the production of goods and services, leading to inefficiencies.