The Reason Why Retained Earnings Have a Cost Equal to Rs

question 80

True/False

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 distribute those earnings to its investors. Thus, the cost of retained earnings is based on the opportunity cost principle.

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Definitions:

Population Distribution

The spread of people across a given area or the spread of values of a particular variable across the population studied.

Sample Mean

The average computed from a sample of data, representing the central tendency of the sample.

Large Sample Sizes

Refers to a substantial amount of data points in a sample, which facilitates more accurate estimates of the population parameter.

Degrees of Freedom

A concept in statistics that describes the number of values in the final calculation of a statistic that are free to vary when estimating parameters of a population.