Cost of Equity Capital

Firms may raise equity capital internally by retained earnings. Alternatively, they could distribute the entire earnings to equity share holders & raise equity capital externally by issuing new shares. In both cases, shareholder are providing funds to the firm to finance their capital expenditures. Therefore, equity shareholders required rate of return will be same whether they supply funds by purchasing new shares or by for going dividends which could have been distributed to them. There is, however, a difference between retained earnings & issue of equity shares from firms point of view.