Is the cost of retained earnings another word for the WACC? Its the return required by the shareholders right?
No, you’re getting these terms confused. They really don’t have much relation whatsoever. The “cost” of retained earnings could be looked at as the amount that won’t be paid out to investors through dividends, but IMO, this “cost” shouldn’t be viewed as a cost because when retained earnings are higher, the growth rate is higher… WACC is simply the weighted average of financing costs for a firm and doesn’t really have anything to do with retained earnings which is the percentage of net income not paid out to shareholders through dividends. WACC is not difficult to understand if you read the curriculum on it.
Retained earing belongs to shareholder but reinvested into corporation in stead of issuing more share or debt instrument or borrowing from banks. I think it is another word of wacc if it understood retained earning instead of debt. But if considering it as shareholder equity its cost is cost of equity.
Actually I disagree with both posts. The texts go into details about two difference costs of ‘equity’. a) the cost of issuing new equity in the market. b) the cost of retained earnings. From a capital perspective, the cost of new equity and the cost of retained earnings, both of which are forms of capital, will not be the same. Haven’t gotten to this section for a re-review yet, but I’d suggest you go back and look at the text with this concept in mind.
Right I think the cost of new equity = cost of retained earnings + flotation costs. Of course, the cost of retained earnings is that “cost of equity” in wacc so they are not at all unrelated.
They are related, but as Joey noted, cost of equity is the equity part from WACC + flotation costs. Cost of equity is not = WACC, since retained earnings belong only to stockholders and not to creditors.
cost of RE = part of cost of equity, which on the other hand is part of the WACC