Cost of retained earnings , Financial Management

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Cost of Retained earnings (K )

Retained earnings are that portion of EPS that is retained by the firm.  This may be measured as the rate of return which the existing share holders can acquire by investing the after-tax dividends in alternative opportunity of equal qualities.

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Where, K= cost of retained earnings, D = Expected dividend per share, g = rate  of growth in dividends, NP = Net proceeds per share, t = tax rate and b = cost of  purchasing new securities or brokerage costs, and K= rate of return available to share holders.


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