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.

Part a. Explain why the component costs of debt, preferred stock, and external common equity differ from the new investors required rate of return. (Discuss each separately.)

Part b. Explain why the cost of internal common equity is the same as the new common investors required rate of return.

Part c. Which of the four component sources of financing mentioned in parts a and b provides the cheapest means of financing for the corporation? Explain why you selected this source as the cheapest.

Part d. Based on your answer to part c, what risks should the corporation consider when using this source of financing.