When calculating the cost of capital, the cost assigned to retained earnings should be
A. Zero.
B. Higher than the cost of external common equity.
C. Lower than the cost of external common equity.
D. Equal to the cost of external common equity.
Answer:C
C is corrent. New common equity has floatation costs that increase its cost above retained earnings.
A is incorrect. The cost assigned to retained earnings is not zero.
B is incorrect. Flatation costs must be considered.
D is incorrect. Floatation costs must be considered.
