Question

For a particular firm which of the following sources of funds should have the highest component...

For a particular firm which of the following sources of funds should have the highest component cost? In other words, for which of the following types of funding used by a firm is the cost of capital highest?

a. preferred stock

b. new common stock

c. debt

d. generally, the cost of each of these sources of funds is about the same for one particular firm.

e. retained earnings

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Answer #1

The correct answer is B "New Common stock"

The cost of common stock is the highest because the company has to pay the required return to the shareholders who are the ultimate owners of the company and the highest risk takers and the dividends paid to them is not tax deductible which raises the firm's cost of equity.

The cost of debt is low as the company has to pay regular dividends to them which is tax deductible and it helps to bring down the cost of borrowing to the firm.

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