“There are different approaches to the computation of cost of equity capital and there is no explicit cost of retained earnings
Answers
Explanation:
A corporate president put a senior executive in charge of a failing operation. His only directive was “Get it in the black.” Within two years of that injunction, the new executive moved the operation from a deficit position to one that showed a profit of several million. Fresh from his triumph, the executive announced himself as a candidate for a higher-level position, and indicated that he was already receiving offers from other companies.
The corporate president, however, did not share the executive’s positive opinions of his behavior. In fact, the president was not at all pleased with the way the executive had handled things.
The cost of equity capital is the firm's return to the equity investor.
The different approaches to the cost of equity capital with no explicit costs are -
1. Dividend price approach - According to the dividend price method, the cost of capital can only be determined by comparing dividend per share with the market value per share. This expense indicates a strong relationship between equity stock prices and dividend rates.
2. Earning approach - This strategy suggests we do not co-relate dividend per share with the market value per share but we should use overall earnings and try to co-relate it with the market value of the stock.
3. Realised yield approach - This method is an improvement in the method to dividend rates when measuring capital costs. Within this method we calculate capital costs by reviewing past dividend payments.