A firm may face increases 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

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When a firm exhausts its retained earnings, it may need to obtain new funds from external sources such as debt, preferred stock, or common equity. As a result, the cost of capital can increase due to the costs associated with these additional sources of funding.

A Firm May Face Increases in the Weighted Average Cost