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Cost of Retained Earnings (Kr) is typically:
AHigher than Ke because no tax benefit
BEqual to Kd
CEqual to or slightly lower than Ke
DAlways zero
Answer & Solution
Correct answer: C. Equal to or slightly lower than Ke
1. Retained earnings represent equity-holder funds reinvested in the firm.
2. Conceptually = Ke, less personal-tax/floatation adjustments.
3. In practice, Kr is taken as equal to or slightly lower than Ke.
_Source: ICAI BoS CA Inter Paper 6A, Ch 4 "Cost of Capital", §9_