Question

Why debt is considered as cheapest source of finance not retained earning ?

Answer 1

Dear Student,
Retained Earning is considered as the cheapest source of finance for small companies as Financial risks are low for retained earning. But for large companies who have easy access in the capital market depends less on retained earning as source of finance.
Secondly actually Debt is the cheapest of all sources as tax deductibility of interest makes it cheaper. An increase in tax rate on corporates makes debt relatively cheaper .

Regards,