A) a Cost Should Be Assigned to Retained Earnings Due

question 16

Multiple Choice

• A) A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders could themselves earn a return on earnings if they were paid out rather than retained and reinvested.
• B) No cost should be assigned to retained earnings because the firm does not have to pay anything to raise them-they are generated as cash flows by operating assets that were raised in the past; hence, they are "free."
• C) Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. In this case, the firm's before-tax and after- tax costs of debt will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• D) If a firm has enough retained earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.

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Definitions:

Buy

The act of acquiring ownership in a financial asset or good, often with the expectation that its value will increase over time.

Basis Risk

Basis Risk is the risk that the price difference between a futures contract and the underlying asset will widen or narrow, impacting hedging strategies.

Futures Prices

Futures prices are the agreed prices at which future contracts for commodities, securities, or financial instruments will be bought or sold at a future date.

Cash Price

The actual price a buyer pays in cash at the time of purchase, as opposed to credit purchase terms.