The internal cost of common equity is the same as the common stockholders required return while the component costs of debt, preferred stock, and external common equity each have a different component cost than the investors required return in each respective category of financing sources.
a) Explain why the cost of debt is different from the bondholders required rate of return.
b) Explain why the cost of preferred stock is different from the preferred stockholders required rate of return.
c) Explain why the cost of external common equity is different from the common stockholders required rate of return.
d) Explain why the cost of internal common equity is the same as the common stockholders required rate of return.
e) Which component source is the least expensive source of financing for the corporation? What makes your selection the cheapest source to use? Are there any risks the corporation faces for using a larger amount of financing from your selected component source of financing?