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How do we calculate the cost of retained earnings?
I know it is the opportunity cost of investors investing that money somewhere else.
But what is the formula to calculate it?
Also, should we include that cost of retained earnings in the WACC calculation?It is effectively included in the WACC because we use the cost of equity and the total market value of equity.
The market value of equity includes retained earnings – it is the most obvious reason for the market value being higher than the share capital 🙂
Just another small doubt
When we get the net present value of a project (lets say $10,000), will we pay the cost of borrowed funds from this money to the lenders? Or is $10,000 the final profit figure which will go the retained earnings and the cost of capital repayment has already been done in the NPV calculation?The NPV is after accounting for interest and is the gain that will go to the shareholders (in terms of increasing the market value of the shares).
Oh…and the capital gain on shares will arise at the commencement of the project or after the project is completed?
At the commencement, because share prices are based on future expectations.
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