In order to cover the cost of raising capital to finance investments, the company must generate a minimum rate of return; otherwise, no one will be prepared to purchase its bonds, preferred stock, or common stock.
The firm's necessary rate of return serves as this benchmark, and it is known as the COST OF CAPITAL. The amount of net income that remains for the company after investments dividend payments to shareholders is known as retained earnings (RE). Typically, management of the company stock decides whether to keep the profits or distribute them to the shareholders. The anticipated returns on the securities that a firm issues are referred to as the cost of capital.
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