Which of the following statements is CORRECT? I There is no cost associated with retained...
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Finance
Which of the following statements is CORRECT? I There is no cost associated with retained earnings. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity. Because no flotation costs are required to obtain capital as reinvested earnings, the cost of reinvested earnings is generally lower than the after-tax cost of debt. If a firm's managers have to decide which project to invest in, they should evaluate each project using the standard deviation of each project's expected future cash flows. The flotation cost associated with issuing new common equity is usually the same as the flotation cost of issuing new debt
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