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Question

Which of the following has an implicit cost of capital

A Equity share capital Correct Answer Incorrect Answer
B Retained earnings Correct Answer Incorrect Answer
C Debentures Correct Answer Incorrect Answer
D Preference share capital Correct Answer Incorrect Answer
E Bank loan Correct Answer Incorrect Answer

Solution

Retained earnings are the portion of a company's profits that are not distributed to shareholders as dividends but are instead reinvested back into the business. Although retained earnings do not have an explicit cost of capital, they do have an implicit cost of capital because they represent the opportunity cost of not distributing profits to shareholders.

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