In calculating the cost of capital for an average firm,which of the following statements is true?

Question

Quizplus · Accepted Answer

The cost of a firm's ordinary shares is generally greater than the cost of its bonds. This is because bonds are perceived as lower risk investments since they have a fixed interest rate and a defined maturity date, while investing in ordinary shares is riskier and requires a higher return to compensate for that risk. The cost of a firm's preference shares may be higher than its bonds, but it is generally still lower than the cost of its ordinary shares. The cost of retained earnings may be lower than the cost of bonds, but it is not a separate source of capital and is not typically included in the calculation of the cost of capital.

In Calculating the Cost of Capital for an Average Firm,which