The cost of internal equity (retained earnings)is ____ the cost of external equity (new common stock).
A) greater than
B) equal to
C) less than

Question

Quizplus · Accepted Answer

The cost of internal equity (retained earnings) is typically less than the cost of external equity (new common stock) because retained earnings do not involve any flotation costs or underwriting fees, which are usually associated with external sources of equity. Additionally, external equity investors usually require a higher return to compensate for the perceived risk associated with investing in a company that they are not already invested in. Therefore, companies often prefer to use their retained earnings for financing because it is a more cost-effective source of funds.

The Cost of Internal Equity (Retained Earnings)is ____ the Cost