Why does retained earnings have opportunity cost

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Reference no: EM131921760

1. Why does retained earnings have an opportunity cost? Shouldn't these be cost free funds for the firm to invest? Explain.

2. You have a stock that has a ROE of 4.5% and a payout ratio of 30%. The stock has a required return on equity of 6.75% and with EPS of $9. If a dividend was paid yesterday, what is the current price of the stock?

3. What is the price of the stock in part b if the firm suddenly changed its payout policy such that it now paid out 100% of earnings? Assume EPS remains $9.

Reference no: EM131921760

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