Question

The cheapest source of finance is _____.

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

Answer 1

The correct option is D Retained earning

Retained Earnings

The portion of net profit distributed to shareholders is called dividend and the remaining portion of the profit is called retained earning. In other word, the amount of undistributed profit which is available for investment is called retained earning. Retained earning is considered as internal source of long-term financing and it is a part of shareholders equity.Generally, retained earning is considered as cost free source of financing. It is because neither dividend nor interest is payable on retained profit.