The reason why retained earnings have a cost equal to r_s is because investors think they can (i.e. ,expect to)earn r_s on investments with the same risk as the firm's common stock,and if the firm does not think that it can earn r_s on the earnings that it retains,it should pay those earnings out to its investors.Thus,the cost of retained earnings is based on the opportunity cost principle.

Question

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The explanation given supports the statement that the cost of retained earnings is based on the opportunity cost principle, making the answer true.

The Reason Why Retained Earnings Have a Cost Equal to Rs

The Reason Why Retained Earnings Have a Cost Equal to R_s