In general, it is not possible for re, the cost of new equity, to be lower than rs, the cost of retained earnings.
However, an exception to this rule occurs when the stock price increases just prior to the firm issuing new equity such that it more than offsets the flotation costs and thus, re becomes less than rs.

Question

Quizplus · Accepted Answer

The cost of new equity (re) typically includes flotation costs, making it higher than the cost of retained earnings (rs). A temporary increase in stock price does not change the fundamental cost structure, as flotation costs are still incurred.

In General, It Is Not Possible for Re, the Cost