Which of the following industries should have the highest cost of equity?

The highest cost of equity is typically associated with enterprises that involve greater risk and volatility in their business models. In this scenario, a social media firm is the choice that reflects these characteristics most clearly.

Social media firms operate in a rapidly evolving technological landscape, where user preferences can shift dramatically, and significant competition arises unexpectedly. The business models often rely on advertising revenue, which can be unstable and subject to market conditions. The potential for rapid growth is coupled with high uncertainty regarding revenue streams and regulatory challenges, especially as privacy concerns and content moderation requirements increase.

Due to these factors, investors usually demand a higher return for investing in social media companies as compensation for the increased risk. This higher expected return translates into a higher cost of equity. In contrast, traditional manufacturing, financial services, and retail industries tend to have more stable earnings, longer track records, and more predictable business environments, resulting in lower costs of equity in comparison.