For capital budgeting and cost of capital purposes, the firm should always consider reinvested earnings as the first source of capital¾i.e., use these funds first¾because reinvested earnings have no cost to the firm.

Question

Quizplus · Accepted Answer

Reinvested earnings do have a cost to the firm, known as the opportunity cost, which is the return shareholders could have earned if the earnings were distributed as dividends and invested elsewhere.

For Capital Budgeting and Cost of Capital Purposes, the Firm