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Why does retained earnings have an opportunity cost? Shouldn't these be cost free funds for the...

Why does retained earnings have an opportunity cost? Shouldn't these be cost free funds for the firm to invest? Explain.

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Expert Solution

Retained earning is surplus or cumulative profit that any company have earned in past. Retained earning is combination of previous profits that company have earned.

The amount of retained earning can be invest further in any alternate option if would not be invested here and can be earn more profit in future. As we all know that every amount has a future value means the value of today price would be different in future therefore retained earning have also an opportunity cost.

Retained earning is a amount that has been forgive by shareholder to earn more profit on that (otherwise they can earn additional profit by investing it any alternate option).

However company do not have to pay any cost for retained earning directly to any outsider they pay it cost through earning profit or paying dividend.

I hope this clear your doubt.

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jeff jeffy answered 6 months ago
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