If dividends paid to common stockholders are not legal obligations of a corporation, is the cost of equity zero? Explain your answer.
Cost Of Equity:
The cost of equity is the financing cost that the firm will need to meet the required return from the shareholders' perspective. The cost of equity has an impact on the average cost of capital to the entire firm.
Answer and Explanation:
The cost of equity can be drawn from the expected dividends. However, if the dividends are not paid out, it does not mean that the cost of equity equal to zero. From the shareholders' perspective, the cost of equity or the required rate of return is the opportunity cost that the shareholders give up other investments for the equity investment in the firm. For instance, instead of placing the money in a savings account with an interest rate of 10% annually, the investor would expect to earn more than 10% when investing in a firm.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Corporate Finance: Help & ReviewChapter 3 / Lesson 18