question archive 1) Why is the cost of common stock the highest of the three types of financing and the cost of debt the lowest? 2) What advantage do we get from using three different methods to calculate the cost of common stock financing?
1) Why is the cost of common stock the highest of the three types of financing and the cost of debt the lowest? 2) What advantage do we get from using three different methods to calculate the cost of common stock financing?
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1) Why is the cost of common stock the highest of the three types of financing and the cost of debt the lowest?
2) What advantage do we get from using three different methods to calculate the cost of common stock financing?
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As we know that common stock,preferred stock and debt are three type of financing.Common stock financing is highest because common stock gives ownership to shareholders so its highest value while the debt is lowest because debt required to give interest even though organization does not earn profit.
Following are the the advantages of three different methods to calculate the cost of Common stock financing.
Dividend discount model provide consistency for longer period to calculate the cost of Common stock financing.
CAPM is widely and eassy method to calculate cost of Common stock financing.
Debt plus risk premium model provide advantages that our stock is traded on premium to cover debt.
