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HOSTING A TOTAL OF 318 FORMULAS WITH CALCULATORS

Cost Of Retained Earning

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.

e[1-t][1-b]

HERE,e=Cost Of Equity, t=Tax Rate,b=Brokerage/commissioner.

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