Why do different sources of finance have different cost?

Answer 1

Different sources of finance have varying costs due to factors such as risk, terms of repayment, and the nature of the capital. For example, equity financing often comes with higher costs because investors seek a return that compensates for the risk of ownership, while debt financing typically has lower costs due to fixed interest rates and priority in repayment during liquidation. Additionally, market conditions and the company's creditworthiness can influence borrowing costs. Ultimately, the trade-off between risk and return determines the pricing of different financing options.