Which of the following statements about the cost of capital is TRUE? A) Ideally historical measures of the component costs from prior financing should be used in estimating the appropriate weighted average cost of capital. B) The cost of issuing new equity could possibly be lower than the cost of retained earnings if the market risk premium and risk-free rate decline by a substantial amount. C) In the weighted average cost of capital calculation, the cost of preferred stock must be adjusted for the cost to issue new preferred stock. D) The marginal cost of capital will decrease as more and more capital is raised during a given period.
what is the cost of retained earning? How can we calculate it?
Is the answer D? My guess on the cost of retained earnings is that it would be the opportunity cost of retaining the earnings and not investing elsewhere. If this is true then you would assume the cost of raising new equity and the cost of retaining earnings (opportunity cost) would be the same. cheers otaw
Flotation costs…
otaw, opp cost is an eco concept, and I think we’re talking strictly accounting here. Also MCC INCREASES as more capital is raised in any given period. Joey, aren’t flotation costs only incurred when new equity is issued? As such, how can that be cost of RE? I didn’t even think there’s an accounting cost to holding RE? I’m getting confused. Anyway, I think the answer is C. In WACC cost of preferred stock is net of flotation costs.
Definetly C A Historical measures don’t do you any good as markets change all the time B cost of retained should always be lower than new equity C the price of preffered changes all the time and therefore the cost too D the more capital you are trying to raise to cost increases not decreases
C it is. Thanks for your help here.
lola Wrote: ------------------------------------------------------- > otaw, opp cost is an eco concept, and I think > we’re talking strictly accounting here. Also MCC > INCREASES as more capital is raised in any given > period. > > Joey, aren’t flotation costs only incurred when > new equity is issued? As such, how can that be > cost of RE? I didn’t even think there’s an > accounting cost to holding RE? I’m getting > confused. > Yep. The “flotation costs” was in response to “the cost of raising new equity and the cost of retaining earnings (opportunity cost) would be the same”
cool, thanks.
when u issue new ps, how do u adjust the current cost of ps to the new issues?