The marginal cost of capital rises
1) because the cost of retained earnings exceeds the cost of new shares
2) because the cost of new shares exceeds the cost of retained earnings
3) if the firm issues secured debt instead of debentures
4) if the firm issues debentures instead of secured debt

Question

The marginal cost of capital rises​
1) because the cost of retained earnings exceeds the cost of new shares
2) because the cost of new shares exceeds the cost of retained earnings
3) if the firm issues secured debt instead of debentures
4) if the firm issues debentures instead of secured debt

Quizplus · Accepted Answer

The marginal cost of capital rises because the cost of new shares often exceeds the cost of retained earnings due to flotation costs and other factors. Additionally, issuing debentures, which are unsecured debt, typically carries a higher interest rate than secured debt, due to the higher risk to lenders.

The Marginal Cost of Capital Rises​

The Marginal Cost of Capital Rises