The correct answer is: B. cost of new common equity.
The cost of equity is the rate of return that a company must earn on its equity capital in order to satisfy its investors. It is a measure of the riskiness of a company’s stock, and it is used to calculate the company’s weighted average cost of capital (WACC).
The cost of new common equity is the cost of raising equity capital by issuing new shares of stock. It is higher than the cost of retained earnings because investors require a higher return on new shares because they are more risky.
The cost of initial offering is the cost of raising equity capital by selling shares of stock in an initial public offering (IPO). It is higher than the cost of new common equity because it includes the costs of underwriting, marketing, and legal fees.
The cost of preferred equity is the cost of raising equity capital by issuing preferred shares. It is lower than the cost of common equity because preferred shares have a fixed dividend and are less risky.
The cost of floatation is the cost of issuing new securities, such as stocks or bonds. It includes the costs of underwriting, marketing, and legal fees.
Therefore, the cost of equity which is raised by reinvesting earnings internally must be higher than the cost of new common equity.