Question

What is the cost of retained earnings

Answer 1

Capital in a business usually comprises of equity and debt. In many cases for a debt free business the only source of capital is money raised by issue of shares from the shareholders. When a firm earns profit then it may decide not to distribute the earnings to the shareholders in the form of dividend. It retains its earnings and uses it in the capital for growth oppurtunities of the business. The cost of retained earnings is the return expected by the shareholder from its investments. Since dividends are not paid to them and the earnings is retained, cost of retained earnings can also be described as the loss that an investor incurs as the same amount invested elsewhere might have fetched him some returns.