Generally, the order of cost, from the least expensive to the most expensive, for long-term capital ofa corporation is
A) preferred stock, retained earnings, common stock, new common stock.
B) common stock, preferred stock, long-term debt, short-term debt.
C) new common stock, retained earnings, preferred stock, long-term debt.
D) long-term debt, preferred stock, retained earnings, new common stock.

Question

Quizplus · Accepted Answer

Long-term debt is usually the cheapest form of long-term capital because it typically has the lowest cost of capital. Preferred stock is often more expensive than debt, and new common stock is typically the most expensive form of capital due to the high cost of issuing new shares. Retained earnings fall in between preferred stock and common stock in terms of cost. Therefore, the correct order of cost is long-term debt, preferred stock, retained earnings, new common stock.

Generally, the Order of Cost, from the Least Expensive to the Most