The cost of retained earnings is considered to be equal to the required rate of return on a firm's outstanding common stock.

Question

Quizplus · Accepted Answer

Retained earnings refer to the portion of a firm's profits that are not distributed as dividends to shareholders but are instead reinvested into the business. As such, the cost of retained earnings is essentially the opportunity cost of not distributing those earnings to shareholders. Since the required rate of return on a firm's common stock represents the minimum return that investors expect to earn on their investment, it is reasonable to assume that the cost of retained earnings is equivalent to this rate. Therefore, the statement is true.

The Cost of Retained Earnings Is Considered to Be Equal