Why different source of capital have different costs?

Different sources have different costs because of: – Duration of lending e.g. long term loans will earn a higher interest rate than short term loans due to the maturity risk premium. – Depending on the source of funds for lending, different sources of capital will add a % profit margin thus different cost of capital.

Which source of finance is cheaper?

Shareholders funds refer to equity capital and retained earnings. Borrowed funds refer to finance raised as debentures or other forms of debt. Retained earnings are the part of funds which are available within the business and is hence a cheaper source of finance.

Is one of the expensive sources of finance?

Common stock are considered as more expensive source of fund against the preferred stock which has a fixed component of dividend.

What is difference between source finance?

Internal sources of finance include Sale of Stock, Sale of Fixed Assets, Retained Earnings and Debt Collection. In contrast, external sources of finance include Financial Institutions, Loan from banks, Preference Shares, Debenture, Public Deposits, Lease financing, Commercial paper, Trade Credit, Factoring, etc.

Which is the cheapest long term sources of finance?

Retained earning is considered as internal source of long-term financing and it is a part of shareholders equity. Generally, retained earning is considered as cost free source of financing. It is because neither dividend nor interest is payable on retained profit.

What are the main sources of long-term finance?

Long-Term Sources of Finance

• Share Capital or Equity Shares.
• Preference Capital or Preference Shares.
• Retained Earnings or Internal Accruals.
• Debenture / Bonds.
• Term Loans from Financial Institutes, Government, and Commercial Banks.
• Venture Funding.
• Asset Securitization.