Firms may also raise external equity capital by issuing new shares. In this case, the firm will have to incur some flotation (transaction) costs which will eventually raise the cost of equity. In order to adjust the cost of equity to flotation costs, we use the following equation:

where F shows the flotation costs incurred during the issue of the new shares. By incorporating the flotation costs in the model, the rise in the cost of equity after new stock offerings is accounted for. The correct answer is B.