In order to enhance the wealth of stockholders and to send positive signals to the market, corporations generally raise funds using the following order:
A) Retained earnings, equity, debt.
B) Retained earnings, debt, equity.
C) Debt, retained earnings, equity.
D) Equity, retained earnings, debt.

Question

Quizplus · Accepted Answer

Retained earnings are the profits generated by the company that are reinvested back into the business. It is the first source of funding because it does not require any additional cost of capital. Debt comes after retained earnings because it is cheaper than equity financing due to the tax-deductible interest payments. Finally, equity is the last source because it dilutes the ownership and control of the existing shareholders. Therefore, the most appropriate order is retained earnings, debt, and equity.

In Order to Enhance the Wealth of Stockholders and to Send