Question

The reason why retained 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 pay those earnings out to its investors. Thus, the cost of retained earnings is based on the opportunity cost principle.

Answer 1

true

Step-by-step explanation:

Retained earnings and the return on stocks should always have the same cost because they both represent the return on stockholders' equity. When a firm earns a profit, it can either distribute the money as dividends or hold it in retained earnings for investing in future or current projects. But retained earnings is basically equity.