A firm's cost of ___________ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves..

Question

Quizplus · Accepted Answer

The cost of retained earnings reflects the opportunity cost of foregoing dividends that could have been received by shareholders and reinvested elsewhere. This is because retained earnings are funds that are not distributed as dividends but kept by the firm to reinvest in the business. The cost of debt (A) reflects the interest paid to creditors for borrowing funds, and the cost of new common equity (C) refers to the cost of issuing new shares of stock to raise capital from investors.

A Firm's Cost of ___________ Reflects an Opportunity Cost: What