BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Cost of equity
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Cost of debt
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Cost of bank loan
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Cost of term loans
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Detailed explanation-1: -Cost of retained earnings is equal to Cost of equity. The cost of retained earnings is the earnings foregone by the shareholders. In other words, the opportunity cost of retained earnings may be taken as the cost of retained earnings.
Detailed explanation-2: -Retained earnings represents the capital left after paying out dividends. The opportunity cost of retaining earnings is dividends, and is therefore equivalent in cost to the equity that expects those dividends. As a result, understanding the retention ratio is dependent on deriving the dividend payout ratio.
Detailed explanation-3: -The cost of those retained earnings equals the return shareholders should expect on their investment. It is called an opportunity cost because the shareholders sacrifice an opportunity to invest that money for a return elsewhere and instead allow the firm to build capital.
Detailed explanation-4: -The cost of retained earnings is equal to the required rate of return on a firm’s outstanding common stock.
Detailed explanation-5: -Are retained earnings a type of equity? Retained earnings are a type of equity and are therefore reported in the shareholders’ equity section of the balance sheet. Although retained earnings are not themselves an asset, they can be used to purchase assets such as inventory, equipment, or other investments.