In: Finance
As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will
1. |
decrease. |
|
2. |
change in an undetermined direction. |
|
3. |
increase. |
|
4. |
remain the same. |
As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will INCREASE
Option 3 is correct.
Once retained earnings exhausted the company will face shortage of funds. it should either raise funds through debt funds or raise new capital. since shortage of funds customers taking high risk expected high returns and increases the overall cost of capital.