For 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 known as the opportunity cost. When the firm uses retained earnings, it forgoes the opportunity to invest those funds elsewhere or pay dividends to shareholders. Therefore, the firm should consider all potential sources of capital, both internal (such as retained earnings) and external (such as debt or equity), and weigh the costs and benefits of each.

For Capital Budgeting and Cost of Capital Purposes,the Firm Should