The opportunity cost of retained earnings between the problem of theory and the mechanism of calculation

Abstract

Businesses rely on multiple financing sources to finance their operational, production, commercial, or service operations. These sources include owned and borrowed sources. The first includes common and preferred stocks, retained earnings, and surplus capital. The second contains loans of different terms (long, medium, and short-term) and commercial credit. Banking, as well as bonds. Each of these sources has a cost for its use in financing. Still, some writers believe that not calculating a cost on owned capital can be an acceptable measure, given the impossibility of separating the personality of the economic unit from its owners.
In contrast, other writers see the necessity of calculating it to know the efficiency of capital management. However, not calculating this cost reduces the effectiveness of the management’s financial reports and does not help the organization’s performance in exploiting or investing these in judging the sources, including retained profits as a source of self-financing (internal). This research revolves around the cost of the hypothesis. An alternative to this source is to compare the return that the establishment achieves from reinvesting it and the return that shareholders can achieve if paid as a dividend and reinvested by them.