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Why is the cost of financing a project with
than the cost of financing it with a new issue of common stock?
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- Which of the following is not a determinant of investment? a) The efficiency of capital equipment b) The level of consumer demand c) Interest rates d) The willingness of investors to buy new share issuesWhy is the cost of retained earnings cheaper than the cost of issuing new common stock? Group of answer choices Issuing new common stock may send a negative signal to the capital markets, which may depress the stock price. When a company issues new common stock they also have to pay flotation costs to the underwriter. Either NeitherHow and why should the cost of capital change when the Company must rely on new issues of common stock v retained earnings when obtaining capital from equity?
- Why is there a cost for retained earnings? Group of answer choices Earnings can be reinvested or paid out as dividends Investors could buy other securities, earn a return Neither EitherWhich of the following statements is NOT CORRECT? a. The cost of retained earnings is less than the cost of new common stock due to flotation costs. While retained earnings may appear to be free money on the surface, there is an opportunity cost to them as these funds could be invested elsewhere and earning a return for shareholders. Due to the lower cost of retained earnings, companies generally prefer to use retained earnings to finance their projects, and only issue new common stock when they absolutely must. b. There are two ways to raise common equity. One source is retained earnings that involves bringing in new funds from outside the company, which represents external equity. The second source is new stock issues that involves bringing in new funds from current stockholders of the company, which represents internal equity. c. Flotation costs reduce the amount of capital the firm receives from a new stock issue. The company must make each…Which of these would best improve a firm's liquidity position? *a. Lower profitabilityb. Higher capital spendingc. Higher need for noncash current assets on the balance sheetd. Declaration of stock dividends
- The pecking order theory of capital structure suggests that managers will choose to utilise retained earnings before issuing additional debt when financing new projects. Does that imply anything about the flotation costs of issuing new securities?a. What is Flagg’s unlevered cost of equity? What are its levered cost of equity and cost of capital for the post-horizon period? b. What is Flagg’s value of operations to Red ValleyWhat is a firm’s cost of capital? Include discussions about debt, preferred stock, common stock and retained earnings. Keep in mind that the cost of capital is rate of return required by investors for a firm’s securities. When would you use debt, preferred stock, common stock or retained earnings?
- what is the firm’s cost of preferred stock and cost of a new issue of common stock? Which of the two sources offers a lower cost?Which one of the following statements is correct concerning both the dollar return and the percentage return on a share investment? a. The dollar return is dependent on the size of the investment while the percentage return is not. b. The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not. c. The dollar return considers the time value of money while the percentage return does not. d. Dollar returns are based on capital gains while percentage returns are based on the total rate of return. Clear my choiceWhy do come companies prefer to use discounting in their capital investment decisions? What is a risk associated with this discounting model?
