Question
Which of the following statements is incorrect about the sources of finance used by companies: Raising finance through borrowing is considered an external source of finance. The company's choice between different external sources of finance could impact its overall cost of capital. Retained earnings are an external source of finance available for the company. Raising finance through share issue is considered an external source of long-term finance.
Answer
4.2
(258 Votes)
Harley
Professional · Tutor for 6 years
Answer
Retained earnings are an external source of finance available for the company.
Explanation
## Step 1:Understanding the concept of internal and external finance. Internal souces of finance are those that come from within the company, like retained earnings or revenue from sales. External sources of finance are the funds raised from outside the company and typically involve the company losing a level of autonomy, this can include loans, grants, issuing shares.## Step 2:Working with the glasses one by one to determine the incorrect statement.# Step 3:-Borrowing is an external source of finance, it requires the company to seek funding from a bank or other financial institutions externally. The statement is correct.-The company's choice of different external sources of finance does impact its overall cost of capital. The cost incurred may vary depending on if they opted for equity, debt, or a mix of both. The statement is correct.-Retained earnings are an internal source of finance since the company generates the earnings itself-- they keep a part of the profit instead of distributing everything to shareholders. This statement is incorrect.-Issuing shares is a type of equity financing which counts as an external source of financing because funds are raised from outside investors. So this final statement is correct.From step 2 and step 3, we can see that the only incorrect statement given is that "Retained earnings are an external source of finance available for the company."