Question

For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital (i.e., use these funds first) because retained earnings have no cost to the firm.A. True.B. False.

Answer 1

Answer:

False

Explanation:

Even though the main reason why a corporation should hold retained earnings is to use them as a source of capital, it doesn't mean that retained earnings don't have any cost associated with them.

The cost of holding retained earnings is the rate of return that shareholders require on the corporation's stock.