A firm may face increase in the weighted average cost of capital either when retained earnings have been exhausted or due to increases in debt, preferred stock, and common equity costs as additional new funds are required.

Question

Quizplus · Accepted Answer

This statement is correct. When a firm exhausts its retained earnings, it may need to seek external financing through debt, preferred stock or common equity. As the firm raises additional funds, the cost of each of these sources of financing may increase, leading to an overall increase in the firm's weighted average cost of capital.

A Firm May Face Increase in the Weighted Average Cost