Question
Which of the following statements is NOT correct? A. No cost should be assigned to reinvested earnings because the firm does not have to pay
Which of the following statements is NOT correct?
A. No cost should be assigned to reinvested earnings because the firm does not have to pay anything to raise them. They are generated as cash flows by operating assets that were raised in the past; hence, they are "free."
B. A cost should be assigned to reinvested earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders would themselves expect to earn a return on earnings that were distributed rather than retained and reinvested.
C. If a firm has enough reinvested earnings to fund its capital budget for the coming year, then there is no need to estimate a cost of new cost of equity from new common stock.
D. A firm's cost of reinvesting earnings is the rate of return stockholders require on a firm's common stock.
E. Because no flotation costs are required to obtain capital as reinvested earnings, the cost of reinvested earnings is generally lower than the cost of new common stock.
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