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Cost of retained earnings
Financial Management
Why is this formula applied. Why is tax and floatation cost deducted?
Answers (1)
Suppose if cost of equity is 20%, and where dividend is taxable @ 30% and Flotations cost are 5%, and if you invested â?¹ 1,00,000 i will receive 20,000*70%*95% 13,300 after paying taxes and floatation costs. So in case of retained earnings are reinvested by company you will not to pay taxes and flotation costs. you are expecting 13,300 on 1,00,000 investment. That is why Kr is adjusted Kr=Ke(1-t)(1-f)
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