Suppose your ﬁrm is going to ﬁnance a new project 100% with retained earnings. Your boss claims
that since the earnings are already being retained and that since no outside ﬁnancing is required,
the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained
earnings risk-free? Why or why not?

Question

Quizplus · Accepted Answer

The Answer of Suppose your ﬁrm is going to ﬁnance a new project 100% with retained earnings. Your boss claims
that since the earnings are already being retained and that since no outside ﬁnancing is required,
the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained
earnings risk-free? Why or why not?

Suppose Your ﬁRm Is Going to ﬁNance a New Project