Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

In the context of investments in securities, the cost of raising capital through retained earnings is:

Zero, since no funds are raised externally

Equal to the required rate of return on equity

Lower than the cost of debt due to tax benefits

Equal to the dividend payout ratio

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Verified step by step guidance

Understand the concept of retained earnings: Retained earnings represent the portion of net income that a company retains rather than distributing as dividends. These funds are reinvested into the business and are considered an internal source of financing.

Recognize the cost of retained earnings: Although retained earnings do not involve external fundraising, they still have an implicit cost. This cost is equal to the required rate of return on equity, as shareholders expect a return on their investment whether funds are distributed as dividends or reinvested.

Compare retained earnings to other sources of capital: Retained earnings are not 'free' because they represent an opportunity cost. The company must generate returns at least equal to what shareholders could earn elsewhere (the required rate of return on equity).

Clarify why the cost of retained earnings is not zero: While no external funds are raised, the company must still meet shareholder expectations for returns, making the cost of retained earnings equal to the required rate of return on equity.

Eliminate incorrect options: The cost of retained earnings is not lower than the cost of debt due to tax benefits, nor is it equal to the dividend payout ratio. The correct understanding is that it is equal to the required rate of return on equity.