Comment on the following: As there is no explicit cost of retained earnings, these funds are free of cost.

Retained earning is an internal source of long-term financing and it is a part of shareholders equity. Since there is no explicit payout from the retained earnings, it has been argued that there is no cost to the firm for carrying these retained earnings as neither dividend nor interest is payable on retained earnings. However this statement is not true. It is further stated that these retained earnings acquire the character of owners' perpetual capital and as such, the return on investment of the firm is ultimately proportional to the rate of growth of retained earnings. The capital that is reinvested in business carry some cost if that is ideal and the firm bears a cost on it which affects the profitability of the firm. Therefore, the cost of retained earnings is the opportunity cost of returns obtained in a similar investment elsewhere.