Question

Which of the following is true? Internal equity is cheaper than external equity. The advantage of using debt for a firm is that it increases the chance of going bankruptcy. The chance of going bankruptcy tends to be very low for a firm, therefore, firms can ignore it when determining their capital structure. The before-tax and after tax cost of equity is different.

Answer 1

Yes it is True that Internal equity is cheaper than external equity.

Step-by-step explanation:

Internal equity compares the pay rates between colleagues in the same firm. It is used as standard to ensure fairness. It is the net income realized after subtracting tax and liabilities as well as expenses incurred.

External equity on the other hand is comparing the pay workers in different organizations. It helps to set a benchmark for payment of staff at the same grade level in different companies. It can be used as a yardstick to measure whether a particular company's pay rate competes favorably with other companies.

Internal equity also called retained earnings is generally less expensive than external equity for tax reasons among others.