Cost of Capital 2

All else equal, sort the following in the order of highest to lowest cost : A) debt. B) preferred stock. C) new common stock. D) retained earnings. I dont know the answer here, my guess is C-B-A-D. Can someone confirm?

Who owns those retained earnings?

C-D-B-A Retained earnings are part of shareholders equity. Therefore would C and D be very similar? cheers

I’d go with C-D-B-A too.

Hmm: Wikipedia: Note that retained earnings are a component of equity, and therefore the cost of retained earnings is equal to the cost of equity. Dividends (earnings that are paid to investors and not retained) are a component of the return on capital to equity holders, and influence the cost of capital through that mechanism. TeachMeFinance: Cost of retained earnings – The residual of an entity’s earnings over expenditures, including taxes and dividends, that are reinvested in its business. The cost of these funds is always lower than the cost of new equity capital, due to taxes and transactions costs. Therefore, the cost of retained earnings is the yield that retained earnings accrue upon reinvestment. Cost of Retained Earnings Cost of internally generated funds. It is an imputed or opportunity cost or the dividends given up by the common stockholders. It is the rate that investors can earn elsewhere on investments of comparable risk. ---- Anyway, given that preferred is cheaper than common, “equity” (which is both) must lie in between. So: common, retained earnings, preferred, debt.

good point darien

Right order but cost of new equity = cost of retained earnings + flotation costs.

CDBA new equity because of flotation costs RE because of risk Prefferred (between debt and equity) Debt - the safest because of priority order

ok that makes it clear