Cost of Retained Earnings

The cost of retained earnings is the return prevailing in the market for common stock of equal risk to that already outstanding. The cost of retained earnings is also called the cost of internal capital or the cost of internal equity. The cost of retained earnings is computed using one of three methods: the capital asset pricing model, the dividend yield plus growth rate method (also called the discounted cash flow method), or the bond yield plus risk premium method. Since these various methods will normally provide different results, an average of the three results is often used for the weighted average cost of capital. See also weighted average cost of capital and cost of long-term debt and cost of preferred stock.