Retained earnings are a cheaper source of funds than the sale of new equity because

Question

Quizplus · Accepted Answer

Retained earnings are a cheaper source of funds for a company because there are no flotation costs associated with the sale of new equity. Additionally, when a company retains its earnings instead of paying them out as taxable dividends, it defers the tax liability to shareholders. Moreover, the sale of new equity usually leads to dilution of existing shareholders' stake in the company as new shares are often priced below the current market price. Therefore, all three statements in the answer choices are correct, making D the best choice.

Retained Earnings Are a Cheaper Source of Funds Than the Sale