Why is the cost of retained earnings the equivalent of the firm’s own required rate of return on common stock (Ke)?

The required rate of return is the minimum return an investor will acknowledge for possessing an organization's stock, as compensation for a given level of risk related with holding the stock. The required rate of return is also utilized in financial manamgment of the companies to determine the profitability of investment projects.

In the stock markets, there are numerous of investments from which to choose, so it isn't unlikely to expect the stockholder could take dividend payments and again invest it for a comparable yield.Thus while computing the cost of retained earnings, it takes back to the point of the cost of common stock. The cost of retained earnings is equivalent to the rate of return on common stock of the firm’s .