Why does retained earnings have an opportunity cost, Financial Management

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Why does retained earnings have an opportunity cost

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

2. You have a stock that has a ROE of 4.5% and a payout ratio of 30%. The stock has a required return on equity of 6.75% and with EPS of $9. If a dividend was paid yesterday, what is the current price of the stock?

3. What is the price of the stock in part b if the firm suddenly changed its payout policy such that it now paid out 100% of earnings? Assume EPS remains $9.

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Financial Management: Why does retained earnings have an opportunity cost

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Financial Management: Why does retained earnings have an opportunity cost

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