The Reason Why Retained Earnings Have a Cost Equal to R_s

question 12

True/False

The reason why retained 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 pay those earnings out to its investors.Thus,the cost of retained earnings is based on the opportunity cost principle.

---

Definitions:

Stimulus Motive

An innate tendency to respond to stimuli in the environment in a certain manner, driven by needs for exploration, manipulation, and activity.

Exploration

The act of investigating, studying, or traveling to new areas to learn about them.

Manipulation

An attempt to influence or control the behavior or emotions of others for one’s own purposes, often without their consent.

Sexual Response Cycle

The sequence of physical and emotional changes that occur as a person becomes sexually aroused and participates in sexually stimulating activities, including phases like excitement, plateau, orgasm, and resolution.