Asked by Derin Jabour on May 21, 2024
Verified
The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock.
External Equity
Refers to funds raised through issuing shares of stock to outside investors, as opposed to internal financing through retained earnings.
Required Rate
The minimum return an investor expects to achieve from an investment, considering its risk level.
- Compare the cost of external equity with the cost of retained earnings and understand flotation costs.
Verified Answer
JO
JILLIAN OZELLOMay 23, 2024
Final Answer :
False
Explanation :
The cost of external equity is generally higher than the required rate of return on the firm's outstanding common stock. This is because new investors may require a higher return to compensate for the higher risk associated with investing in a company that they are not already invested in.
Learning Objectives
- Compare the cost of external equity with the cost of retained earnings and understand flotation costs.