If dividends paid to common stockholders are not legal obligations of a corporation, is the cost of equity zero? Describe your answer.
Even though common stockholders do not contain a contractual claim on dividends the funds supplied by stockholders definitely contain a cost. Equity investors are paid last and therefore they are taking the greatest risk among all of the suppliers of capital. If the company does not get a higher rate of return onto equity funds to compensate for the higher risk taken through equity investors, the price of the stock will fall and thus the value of the firm.