ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations
Which of the following is a typical feature of retained earnings as a source of finance?
Retained earnings are an internal source of finance, so no new investors need to approve them and there are no issue costs or prospectus. They are not costless, because shareholders give up dividends they could have reinvested elsewhere, which is the opportunity cost.
- AIt involves issue costs and requires a prospectus
- BIt is an internal source that needs no external approval from new investorsCorrect
- CIt has no opportunity cost to shareholders
Explanation
Retained earnings are generated internally, so no new investors or issue costs are involved. However, they are not free, since shareholders could have received the cash as dividends and invested it elsewhere, which is an opportunity cost.
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