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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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The cost of retained earnings is less than the cost of new outside equity capital. Consequently, it is totally irrational for a firm to sell a new issue of stock and to pay cash dividends during the same year. Discuss the meaning of those statements.

Summary Introduction

To explain: Whether it is totally irrational for a firm to sell a new issue stock and to pay cash dividends during a year.

Introduction:

Retained Earnings: A company has kept a certain amount of its net earnings to reinvest into the business or to pay its debt instead of paying it as a dividend is known as the retained earnings. It is recorded under the shareholder’s equity in balance sheet.

Explanation
  • Selling stock and paying dividends at the same time is not necessarily irrational for the firm as it may decrease it’s goodwill in the market...

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