GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Which one is more appropriate for cost of retained earning?
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Opportunity cost to the firm
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Weighted Average cost of capital
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Expected rate of return by the investor
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None of the above
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Explanation:
Detailed explanation-1: -Opportunity cost to the firm is the more appropriate for cost of retained earnings. The opportunity cost of the firm includes explicit cost as well as implicit cost.
Detailed explanation-2: -Solution: Cost of retained earnings is equal to Cost of equity.
Detailed explanation-3: -These costs are in addition to the returns the firm must offer to equity investors. If the firm instead uses retained earnings, it can avoid flotation costs. For this reason, the cost of new stock is typically higher than the cost of retained earnings.
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