Certified Treasury Professional Practice Exam

Retained earnings are considered the least expensive method of financing for a firm due to the fact that they represent profits that have already been generated and reinvested back into the company rather than being distributed to shareholders as dividends. Utilizing retained earnings does not incur any additional costs such as interest payments or dilution of ownership, which are associated with debt and equity financing options. Moreover, retained earnings do not involve external financing, which means the company avoids transaction costs, underwriting fees, and other expenses associated with issuing new stock or taking on loans. This makes retained earnings not only a cost-effective option but also allows the firm to maintain greater control and flexibility over its capital structure. In contrast, debt financing typically comes with interest obligations that can significantly burden a company's cash flow, while equity financing requires giving up some ownership stake and potentially future profits to shareholders. Convertible bonds, while unique, often have features similar to both debt and equity, thus carrying additional costs and implications regarding management and control.