The Reason Why Reinvested Earnings Have a Cost Equal to Rs

The reason why reinvested earnings have a cost equal to rs is because investors think they can (i.e., expect to)earn rs on investments with the same risk as the firm's common stock, and if the firm does not think that it can earn rs on the earnings that it retains, it should distribute those earnings to its investors.Thus, the cost of reinvested earnings is based on the opportunity cost principle.