Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost.

Question

Quizplus · Accepted Answer

Even though retained earnings do not involve direct payments like dividends or interest, they are not cost-free. The cost of retained earnings is the opportunity cost of not distributing those earnings to shareholders, who could invest them elsewhere for a return.

Funds Acquired by the Firm Through Retaining Earnings Have No