Skip to content

CS Executive · Corporate Accounting and Financial Management · Cost of Capital

Which statement about the cost of equity share capital is correct?

The cost of equity is generally higher than the cost of debt because shareholders are residual claimants who bear greater risk and therefore require a higher return. Dividends are not tax deductible, and retained earnings are not free of cost.

  1. ADividends on equity shares are tax deductible, so cost is computed after tax
  2. BIt is generally higher than the cost of debt because equity holders bear greater riskCorrect
  3. CIt is always zero for retained earnings because no payment is made
  4. DIt is always equal to the preference share cost

Explanation

Equity holders are residual claimants with uncertain returns, so they demand a higher return than lenders. Dividends are not tax deductible, retained earnings carry an opportunity cost, and preference cost differs from equity cost.

Did you get it right without looking?

One question tells you little. A timed set on Cost of Capital shows your real accuracy, how long you take and where you lose marks.

Practise Cost of CapitalFree diagnostic mock

More Cost of Capital questions