Retained earnings are not free because stockholders deserve a return on invested funds regardless of the source of those funds.

Question

Quizplus · Accepted Answer

Retained earnings represent profits that a company has not distributed as dividends but has kept for reinvestment in the business. While these earnings are not paid out to shareholders as dividends, they still belong to the shareholders, and they are entitled to a return on their investment. Hence, retained earnings are not free money, and stockholders deserve a return on invested funds regardless of the source of those funds.

Retained Earnings Are Not Free Because Stockholders Deserve a Return