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 method of inventory costing that includes all manufacturing costs, both variable and fixed, in the cost of a finished product.

Variable Costing

An economic recording tactic that involves only variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) in determining product costs.

Income Statement

A financial statement that shows a company's revenues, expenses, and profits over a particular period, providing insights into its financial performance.

Absorption Costing

A product costing method in accounting that adds up all manufacturing expenses, including direct materials, direct labor, and both kinds of overheads (variable and fixed), to derive a product’s cost.