1) A firm's cost of capital is influenced by
A: capital structure
B: the current ratio
C: par value of common stock
D: net income
2) In general, the least expensive source of capital is
B: new common stock
C: retained earnings
D: preferred stock
3) The cost of retained earnings is less than the cost of new common stock because
A: flotation costs are incurred when new stock is issued
B: marginal tax brackets are not deductible
C: dividends are not tax deductible
D: accounting rules allow a deduction when using retained earnings
Cost of Capital
A firms cost of capital is generally the weighted average of the cost of debt plus the cost of preferred stock plus the cost of equity and retained earnings as per their weights in the capital structure.
Answer and Explanation:
Question 1) Option A is correct
A change in the capital structure would result in a change in the weights of the financing methods which would result...
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fromChapter 15 / Lesson 1
In this lesson, we'll define capital and a firm's capital structure. We'll also discuss the costs associated with each component in the capital structure and learn about the concept of risk and return.