The next important cost of specific source of capital is cost of retained earnings.
The cost of retained earnings is to be computed on the basis of opportunity cost. It does not have any direct cost, instead, the amount of retained earnings loses the opportunity of the investors to earn in the form of dividends due to retained earnings; which are foregone by them one side and on the other side the earnings which are retained are invested in some other investments, would be in a position to yield the return, is the cost of retained earnings.
It could be defined as "cost of retained earnings is the opportunity cost in terms of dividends foregone by with held from the equity shareholders." The cost of retained earnings is nothing but the external criterion which is equal to the Ke. Practically speaking, Ke is more than the Kr due to the floatation cost involved in the process of issue of shares.
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