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 common shares or bonds does have a cost.

Retaining Earnings

Profits that a company reinvests in itself instead of paying out to shareholders as dividends.

Flotation Costs

Those costs occurring when a company issues a new security, including fees to an investment banker and legal fees.

New Common Shares

Issuance of additional shares of a company's stock, which can dilute existing shareholders' equity but raise new capital for the company.