11. Since there is no effect of flotation cost when firms use retained earnings

Question

11. Since there is no effect of flotation cost when firms use retained earnings to finance operations, the cost of retained earnings (internal equity) should be equal to investo required rate of return on equity A) TRUE B) FALSE 12. A company has preferred stock that can be sold for $21 per share. The preferred stock pays an annual dividend of $3.5 per share. Flotation costs associated with the sale of preferred stock equal $1.75 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is A) 18.87%. B) 17.72%. C) 18.26%. D) 18.18%.

Explanation / Answer

Q 11 False-  Cost of retained earnings is not always equal to cost of equity as cost of equity also involves brokerage cost or flotation cost. Cost of equity also includes dividend tax paid by the company.

Q12 Answer D

Cost of preferred stock=3.5/(21-1.75)- 18.18%

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