In order to enhance the wealth of stockholders and to send positive signals to the market, corporations generally raise funds using the following order:
A) retained earnings, equity, debt.
B) retained earnings, debt, equity.
C) debt, retained earnings, equity.
D) equity, retained earnings, debt.

Question

Quizplus · Accepted Answer

Retained earnings are the most cost-effective way to raise funds as there are no costs of issuance or interest payments. If a corporation does not have enough retained earnings, it can then turn to debt financing before equity financing. Debt financing has lower costs compared to equity financing, but it also comes with the risk of bankruptcy if the company cannot meet its debt obligations. Therefore, the optimal order is retained earnings, debt, and then equity financing.

In Order to Enhance the Wealth of Stockholders and to Send