Why Is External Common Equity Capital More Expensive Then Internal

question 1

Multiple Choice

Why is external common equity capital more expensive then internal common equity capital?

• A)Actually, external equity is not more expensive than internal, they both have the same cost.
• B)Because the capital asset pricing model is used to estimate the cost of internal and the dividend valuation model is used to estimate cost of external.
• C)Because internal is free, it has no cost since there is no need to attract investors to raise internal equity.
• D)Because the cost of external must take into account flotation costs, internal does not.

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