The cost of retained earnings is the cost of issuing new common stock without flotation costs.

Question

Quizplus · Accepted Answer

Retained earnings are the earnings that a company keeps for itself rather than distributing them as dividends to shareholders. Retained earnings are a source of internal financing, so they do not involve any flotation costs (such as underwriting fees, legal fees, and printing costs) that are incurred when issuing new common stock. Therefore, the cost of retained earnings is the cost of equity capital that a company foregoes by not paying a dividend and using the earnings for investments, share repurchases, or debt reduction. The cost of retained earnings is usually estimated by using the capital asset pricing model (CAPM) or other methods that reflect the risk and return characteristics of the company's stock.

The Cost of Retained Earnings Is the Cost of Issuing