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Multiple choice business studies company companies act, 2013 - introduction and characteristics introduction to companies companies act, 2013

Which of the following is true?

  1. The cost of retained earnings is always less than the cost of external equity

  2. The cost of external equity is always less than the cost of retained earnings

  3. The cost of retained earnings is lower than the cost of external equity in the presence of flotation costs

  4. In the presence of flotation costs the cost of external equity is less than the retained earnings

  5. None of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Cost of external equity K'ee =required rate of return
f = cost of issue
Hence, in presence of floatation costs, the cost of retained earnings is less than the cost of external equity.