Suppose you are a CFO of a retail business, which is cash rich in the year end.   Your firm is going to finance a new warehouse project 100% with retained earnings. Your boss CEO claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? 

Are retained earnings risk-free? Why or why not? (Suppose your company credit rating is BBB and your bond issuance cost is around 6%, and your shareholder's dividend requirement is around 5%).

Answer rating: 100% (QA)

No it is not appropriate to evaluate the new warehouse project at the riskfree rate of return simply ... View the full answer