## Cost of Retained Earnings (Kr)

Retained earnings belong to the equity shareholders, so they are very much part of equity — and they are not free. Their cost is the opportunity cost of dividends foregone by shareholders.

Therefore Kr is used interchangeably with Ke; the same formulas apply:

$$K_r = K_e$$

Important: Floatation cost is NOT used in computing Kr (the company isn't raising fresh external funds).

### Key P₀ distinction (Doubt Buster)

For Ke: P₀ = Net Proceeds = Issue Price − floatation cost.
For Kr: P₀ = Current Market Price (CMP); if CMP unavailable, use Issue Price.
ICAI has used CMP and Issue Price interchangeably for Kr — state your assumption in a note.

### When personal taxes apply

When the investor's personal income tax (tp) and personal brokerage (tb) are given:

$$K_r = K_e (1 - t_p)(1 - t_b)$$

⚠️ Common exam mistakes

Deducting floatation cost when computing Kr — it is never used for retained earnings.
Using Net Proceeds (issue price less floatation) as P₀ for Kr instead of Current Market Price.
Ignoring the personal income tax and brokerage adjustment Kr = Ke(1 − tp)(1 − tb) when those rates are provided.

Reference:

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Cost of Retained Earnings (Kr)

Worked example

⚠️ Common exam mistakes