Why Is External Common Equity Capital More Expensive Then Internal

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.

Correct Answer:

Verified

Show Answer