Question

A firm's cost of reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves. a. debt b. retained earnings c. short-term loans d. none of the above

Answer 1

Answer:

Retained earnings  

Explanation:

In simple words, retained earnings refers to the earnings that is left with the company after accounting for all the capital charges, that is, dividends on shares and interest on debt. Opportunity cost refers to loss of profits for choosing the best alternative over the second bet alternative.

Companies retain earnings for the purpose of reinvesting them so they have to bear a lower cost . Hence the retained earnings reflect the opportunity cost for the capital providers as they can earn some return on it if was not retained at first place.