3. _____ Which of the following statements is CORRECT? a. Funds acquired by the

ID: 2790440 • Letter: 3

Question

3. _____ Which of the following statements is CORRECT?

a. Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them.

b. The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s retained earnings.

c. A firm’s cost of equity is highly dependent upon the risk level of the firm.

d. A firm’s cost of equity is inversely related to changes in the firm’s tax rate.

Cost of equity is the return expected by the investors. Investors expected return increase with increase in risk and decrease with decrease in risk.

Hence, correct option is c. A firm’s cost of equity is highly dependent upon the risk level of the firm.

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