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:

Total Expenses

The sum of all costs and expenses incurred by a business or individual in a specific period.

Prepaid Rent Expense

An account that represents rent payments made in advance for a future period; classified as a current asset on the balance sheet.

Total Liabilities

The sum of all financial obligations a company owes to external parties, which can include loans, accounts payable, and bonds payable.

Total Expenses

The sum of all costs and expenses incurred by a business during a specific period, including operational, administrative, and selling expenses.