Question

Which of the following statements is correct?a. The cost of new equity (re) could possibly be lower than the cost of retained earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.b. The component cost of preferred stock is expressed as rp(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.c. Its cost of retained earnings is the rate of return shareholders require on a firm's common stock.d. We should use historical measures of the component costs from prior financing when estimating a company's WACC for capital budgeting purposes.

Answer 1

c. Its cost of retained earnings is the rate of return shareholders require on a firm's common stock.

Step-by-step explanation:

The formula to compute the cost of retained earning is as follows

Cost of retained earning = (Expected annual dividend ÷ Price of the stock) + growth rate

It is the rate of return that equates with the cost of equity plus it also earns on the investment done in the company i.e equity

In a mathematical expression,

Cost of retained earnings = Cost of equity

hence, the correct option is c.