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 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 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