Question

The cheapest source of finance is

• A. Debenture
• B. Equity share capital
• C. Preference share
• D. Retained earning

Hint:

Retained earnings are the most cost-effective source of finance because they are internal funds that do not incur additional costs or obligations.

Answer 1

The Correct Option is D

Step 1: Understanding sources of finance.
Finance for a company can be raised through various methods such as debentures, equity share capital, preference shares, or retained earnings. Among these, retained earnings are the cheapest source because they do not involve any external costs or interest payments.
Step 2: Analyzing the options.
(A) Debenture: Incorrect. Debentures involve interest payments, making them a costlier source of finance compared to retained earnings.
(B) Equity share capital: Incorrect. Equity shares may involve costs related to issuing shares and dividend payments.
(C) Preference share: Incorrect. Preference shares also require dividends, making them more expensive than retained earnings.
(D) Retained earning: Correct. Retained earnings are internal funds that do not involve interest or dividend payments, making them the cheapest source of finance.
Step 3: Conclusion.
The correct answer is (D) Retained earning, as it is the most cost-effective source of finance for companies.