Dictionary of Accounting Terms: cost of new external common equity
cost of new external common equity
cost of newly issued common stock. This is higher than the cost of retained earningsbecause of stock flotation costs. Providers of equity capital are exposed to more risk than lenders are because the firm is not obligated to pay them a return. Also, in case of liquidation, creditors are paid before equity investors. Thus, equity financing is more expensive than debt because equity investors require a higher return to compensate for the greater risk assumed.
