The cost of issuing new common stock is calculate the same way as the cost of raising equity capital from retained earnings.
Cost of Equity and Flotation Costs:
This question touches on the cost of equity capital. Essentially, a firm's cost of equity reflects the rate of return the market demands in exchange for taking an ownership interest in the company. A variety of methods can be utilized to determine a firm's cost of equity. Two common methods include the dividend capitalization model and the capital asset pricing model (CAPM).
Answer and Explanation:
The statement is false. The cost of issuing new common stock is not calculated the same way as the cost of raising equity from retained earnings (self-financing). The former entails inclusion of the costs associated with the new issuance, which are referred to as flotation costs. They include underwriting fees, legal fees, and registration fees. Self-financing does not entail flotation costs, which makes this form of equity financing less costly.
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from Corporate Finance: Help & ReviewChapter 3 / Lesson 18