Question

Should we also calculate cost of retained earnings with them being internally generated, and not a form of direct investment by the outsiders? Explain in less than 8 lines.

Answer 1

Yes, we should be calculating cost of retained earning because cost of retained earning will be reflecting the cost of opportunity missed because when retained earnings will be invested into the business it will mean that there will be an opportunity costs associated with it as these retained earning could have been invested into other projects in order to make a higher rate of return, so there will always be an opportunity cost associated with retained earning and hence these retained earning must be provided with a cost and they should be recorded into the overall cost of capital.

These retained earning are internally generated as they are part of profits and they should be accounted into the cost of capital because they are representing an opportunity missed.