capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital--i.e., use these funds first--because retained earnings have no cost to the firm.

Question

Quizplus · Accepted Answer

Retained earnings do have a cost to the firm in the form of an opportunity cost, which is the return the firm could have earned if it had invested the retained earnings elsewhere. Therefore, the firm should compare the cost of using retained earnings to the cost of other sources of capital before making a decision on how to finance its capital budgeting projects.

Capital Budgeting and Cost of Capital Purposes, the Firm Should