Which of the following differentiates the cost of retained earnings from the cost of newly-issued common stock?
A) the cost of the pre-emptive rights held by existing shareholders
B) the greater marginal tax rate faced by the now-larger firm
C) the flotation costs incurred when issuing new securities
D) the larger dividends paid to the new common stockholders

Question

Quizplus · Accepted Answer

The cost of retained earnings is essentially the opportunity cost of not distributing those earnings to shareholders as dividends. On the other hand, the cost of newly-issued common stock would include flotation costs, which are incurred when issuing new securities, and are not applicable to retained earnings. The other options (A, B, and D) do not specifically differentiate between the cost of retained earnings and the cost of newly-issued common stock.

Which of the Following Differentiates the Cost of Retained Earnings