Suppose a new project was going to be financed partially with retained earnings. What flotation costs should you use for retained earnings?
A) use the same flotation cost that would be used to issue new common stock
B) use an average of the flotation costs for debt, preferred and common stock
C) use the industry average flotation cost for common stock
D) zero

Question

Quizplus · Accepted Answer

Retained earnings do not involve issuing new securities, so there are no flotation costs associated with using them for financing. Flotation costs are associated with issuing new securities such as debt, preferred stock, or common stock.

Suppose a New Project Was Going to Be Financed Partially