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what is cost of retained earnings ?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 asked

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

It may be defined as the opportunity cost in terms of dividends foregone by/withheld from the equity shareholders. i.e. in other words, if the company would have given Reserves as Dividends at what rate of return the same would have been invested by the shareholder. So it envisages opportunity cost of money.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

COST OF RETAINED EARNINGS It may be defined as the opportunity cost in terms of dividends foregone by/withheld from the equity shareholders. i.e. in other words, if the company would have given Reserves as Dividends at what rate of return the same would have been invested by the shareholder. So it envisages opportunity cost of money.

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Data?1494421730 answered

Dear Friend > Cost of Retained Earning “ The residual of an firm's earnings over expenditures, including taxes and dividends, that are reinvested in its business. The cost of these funds is always lower than the cost of new equity capital, due to taxes and transactions costs.” In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. http://image.slidesharecdn.com/costofcapital-110427090145-phpapp01/95/cost-of-capital-16-728.jpg?cb=1303895895 Cost of Retained Earnings – Constant Dividend Growth Model = rs = D1/P0 + g Cost of Retained Earnings – Security Market Line Approach rs = rF + b(rM - rF). Thanks

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

COST OF RETAINED EARNINGS It may be defined as the opportunity cost in terms of dividends foregone by/withheld from the equity shareholders. i.e. in other words, if the company would have given Reserves as Dividends at what rate of return the same would have been invested by the shareholder. So it envisages opportunity cost of money. Cost of retained earnings is the same as the cost of an equivalent fully subscribed issue of additional shares, which is measured by the cost of equity capital. Retained earnings are “dividends withheld”, that is, if were in the hands of the investors (shareholders) they could have earned on these by investing somewhere else. The assumption is that the firm is earning “at least equal to ke on these retained earnings. So the cost kr is approximately equal to ke (a little less than ke because of floatation costs are not there, kr < ke) Thanks

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