The correct answer is D. Retained earnings.
Retained earnings are the profits that a company has earned but has not distributed to shareholders as dividends. They are a source of internal financing that can be used to fund new investments or to repay debt.
The cost of retained earnings is the opportunity cost of not distributing the profits to shareholders. This opportunity cost is the return that shareholders could have earned on the profits if they had been distributed as dividends.
The cost of retained earnings is usually lower than the cost of debt or equity financing. This is because retained earnings do not require the company to make interest payments or repay the principal.
However, the cost of retained earnings can be higher than the cost of debt or equity financing if the company has a high dividend payout ratio. This is because the company will have less money available to invest in new projects, which could reduce its future profits.
In conclusion, the cost of retained earnings is the opportunity cost of not distributing the profits to shareholders. This opportunity cost is the return that shareholders could have earned on the profits if they had been distributed as dividends. The cost of retained earnings is usually lower than the cost of debt or equity financing, but it can be higher if the company has a high dividend payout ratio.