The Cost of Equity Capital from the Sale of New

question 2

True/False

The cost of equity capital from the sale of new common stock (r_e)is generally equal to the cost of equity capital from retention of earnings (r_s),divided by one minus the flotation cost as a percentage of sales price (1 − F).

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Definitions:

Marginal Cost

The cost to produce one additional unit of a product or service.

Buffet

A meal consisting of various dishes set out on a table or sideboard from which guests can serve themselves.

Profit Opportunities

Situations where individuals or firms can earn a return on investment that is more than the norm, often due to market inefficiencies or information asymmetries.

Opportunity Cost

The cost of choosing one option over another, represented by the benefits that could have been obtained by choosing the alternate option.