Question

There are different approaches to the computation of cost of equity capital and there is no

explicit cost of retained earning Critically comment.​

Answer 1

Answer:

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Answer 2

The cost of equity is the return also known as rate of return, is the amount company technically pays to its equity investors.

• There are various approaches to compute cost of equity capital, these are -

1. Dividend price method - The cost of capital can only be determined by dividing dividend per share with market value per share. This cost indicates a clear relationship between share price and dividend price.

2. Earning price approach - This approach suggests that we do not co-relate market value per share with dividend per share, but we should use total earnings and try to co-relate it with share market value.

• Compared to some finance elements, even equity shares or debt, businesses have to pay certain interest or dividend costs.
• There is a cost attached to it, business has to bear but one does not pay anything to anybody in retained earnings because it is the enterprise's own money