Answer (B) is correct . Newly issued or external common equity is more costly than retained earnings. The company incurs issuance costs when raising new, outside funds.
Answer (A) is incorrect because The cost of retained earnings is the rate of return shareholders require on equity capital the firm obtains by retaining earnings. The opportunity cost of retained funds will be positive.
Answer (C) is incorrect because Retained earnings will always be less costly than external equity financing. Earnings retention does not require the payment of issuance costs.
Answer (D) is incorrect because Retained earnings will always be less costly than external equity financing. Earnings retention does not require the payment of issuance costs.
|
