Retained earning is a free source of funds to the company. Therefore, we can ignore retained earnings when computing the cost of capital. Do you agree or disagree with this statement?

I disagree with the statement that retained earnings can be ignored when computing the cost of capital. Retained earnings refer to the portion of a company's profits that are not distributed to shareholders as dividends, but instead, are reinvested back into the company. They represent the accumulated earnings over time, which can be used to finance a company's operations and growth.

When computing the cost of capital, which is the average rate of return required by investors to invest in a company, it is essential to consider all sources of funding, including retained earnings. Retained earnings, even though they do not involve any direct cash outflow like external financing methods such as equity or debt, have an opportunity cost. By using retained earnings to finance projects or investments, a company forgoes the potential returns that could have been earned by distributing those earnings to shareholders or investing them elsewhere.

In other words, retained earnings represent equity financing provided by existing shareholders and, therefore, warrant consideration in the computation of the cost of capital. They reflect the shareholders' expectation of a return on their investment and should be factored in when determining the overall cost of funding for the company.