In general,which of the following rankings,from highest to lowest cost,is most accurate?
A) cost of new common stock, cost of preferred stock, cost of debt, cost of retained earnings
B) cost of debt, cost of preferred stock, cost of new common stock, cost of retained earnings
C) cost of new common stock, cost of retained earnings, cost of preferred stock, cost of debt
D) cost of preferred stock, cost of new common stock, cost of retained earnings, cost of debt

Question

Quizplus · Accepted Answer

The cost of new common stock is typically the highest due to flotation costs and the risk premium demanded by equity investors. Retained earnings, while not free, are cheaper because they do not incur flotation costs and do not dilute ownership. Preferred stock generally costs more than debt due to its higher risk (lack of tax deductibility and subordination to debt in case of liquidation) but less than new common stock. Debt is usually the cheapest source of financing due to its tax deductibility and lower risk for investors.

In General,which of the Following Rankings,from Highest to Lowest Cost,is