The cost of retained earnings differs from the cost of new e

The cost of retained earnings differs from the cost of new equity due to:

a. flotation costs.

b. dividends.

c. capital gains yields.

d. both a & c

e. all of the above

The cost of capital is:

the average return on investments.

the average rate paid for the use of investors\' money.

used primarily in projecting financial statements.

both b & c

all of the above

Solution

1)

Retained earnings are generated inside the company. No administration costs, no issue costs, no brokerage is required. Funds generated through new equity requires these costs. All these costs are collectively called as flotation costs.

Hence, correct option is a. flotation costs.