The Reason Why Reinvested Earnings Have a Cost Equal to R_s

question 28

True/False

The reason why reinvested earnings have a cost equal to r_s is because investors think they can (i.e., expect to) earn r_s on investments with the same risk as the firm's common stock, and if the firm does not think that it can earn r_s on the earnings that it retains, it should distribute those earnings to its investors.Thus, the cost of reinvested earnings is based on the opportunity cost principle.

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Definitions:

Sensory Information

Data received by the sensory organs (eyes, ears, skin, tongue, and nose), which is then interpreted by the brain.

Corpus Callosum

A wide bundle of nerve fibers linking the brain's two halves, enabling communication between hemispheres.

Neural Fibers

Long, slender projections of nerve cells, or neurons, that conduct electrical impulses away from the neuron's cell body.

Lateralization

The tendency for some neural functions or cognitive processes to be specialized to one side of the brain or the other.