The cost of capital for retained earnings:
A) cannot be determined
B) may be determined by more than method
C) is greater than the cost of capital for common stock
D) is higher than the cost issuing bonds

Question

Quizplus · Accepted Answer

The cost of capital for retained earnings may be determined by more than one method, such as the dividend growth model, capital asset pricing model (CAPM), and the bond yield plus risk premium approach. Therefore, it cannot be determined by a single method or formula. The cost of capital for retained earnings may be lower than the cost of issuing bonds or common stock, which makes it an attractive source of financing for companies.

The Cost of Capital for Retained Earnings