Answer (B) is correct . Debt financing, such as bonds, normally has a lower after-tax cost than does equity financing. The interest on debt is tax deductible, whereas the dividends on equity are not. Also, bonds are slightly less risky than stock because the bond holders have a first right to assets at liquidation.
Answer (A) is incorrect because The cost to the company of equity instruments is in the form of dividends. Because dividends are not deductible for tax purposes, equity sources of capital have a higher after-tax cost than debt sources.
Answer (C) is incorrect because Preferred stock has a higher after-tax cost than debt.
Answer (D) is incorrect because Common stock has a higher after-tax cost than debt.
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