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When a firm issues new equity, Cost of New Equity is:
ASame as Cost of Retained Earnings
BHigher than Cost of Retained Earnings due to floatation costs
CLower than Cost of Retained Earnings
DEqual to Cost of Debt
Answer & Solution
Correct answer: B. Higher than Cost of Retained Earnings due to floatation costs
1. New equity issuance involves floatation costs (underwriting, brokerage, etc).
2. These costs reduce net proceeds, increasing effective Cost of New Equity.
3. Hence: Cost of New Equity > Cost of Retained Earnings.
_Source: ICAI BoS CA Inter Paper 6A, Ch 4 "Cost of Capital", §7, §9_
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