Blogger Random - Recent - Specific Label Posts Widget - All in One Post Feed Widget

Cost of Retained Earnings

>> April 19, 2010

When a company earns profit, it does not distribute its all profit. Some of profit is retained in the form of reserve. This profit is used for development of company and other productive works. It means retained money is used for more earning of business. So, it will have cost like the cost of equity share capital.

If we have to define it, we can say, it is just minimum rate of return which company should earn on same reserve. Somebody can say that there is no need to calculate cost of retained earning because this cost is not payable in the form of dividend. But in reality, if we think that company is using shareholder fund because all earned profit should be payable as dividend but company is not paying full amount, so shareholders are deserve for getting return on reserved amount.

This is just opportunity cost of the amount which is not given as dividend to shareholders. We can calculate cost of retained earning with following formula. The formula will be same as calculating the cost of equity share capital.

Cost of retained earning =

Expected dividend / Net proceed of retained earning + Growth rate


Expected dividend/ N.P. X ( 1- tax rate ) ( 1- cost of new investment)

You might like:

Follow Us


Post a Comment

About Accounting Education

An educational site with 2500+ articles, solutions, video-guides and tutorials on all topics related to accounting and finance.

Get Update on Mobile

Type in your mobile phone web browser for free access anytime, from any place.The content is designed specifically for cell phones and mobile devices.

Contact Us

Email :

Phone : +91-8557888436

Send an Email
Phone number and vCard
LinkedIn profile
Follow us on twitter