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Retained earnings add to the financial strength and improved credibility of the company. Under this method, the original investment of the project should be received back out of the implementation of the project as early as possible. Contact us on below numbers. (c) Projects based on indigenous technology. Control over the management of the company remains unaffected as there is no addition to the number of shareholders. This sacrifice increases the opportunity cost of retained earnings. Finance, therefore, is called the … Dec 11, 2020 - Sole Proprietorship- Meaning, Features, Merits, Demerits (In hindi) - Class 11 Commerce Video | EduRev is made by best teachers of Commerce. Thus there are fewer administrative costs for deposits. Profit re-invested as retained earnings is profit that could have been paid as a dividend. They are the creditors of the company. As a result, the variability of profit after tax is substantially transmitted to retained earnings. The needs of rapid industrialisation, long-term financial needs of heavy industry beyond the resources of the then existing Institutions, absence of a central agency to coordinate the activities of other financial institutions and gaps in the financial and promotional services were the main causes behind the establishment of the IDBI. This number is taken from the Income Statement after all expenses and taxes are deducted from the revenues. The IFCI gives priority to dispersal of industry development of backward areas, growth of industries in the co-operative sector, etc. It is based on all observation 3. Shareholders are owners of the company. BTech Tuition BCom Tuition Engineering Diploma Tuition BBA Tuition BSc Tuition; Subject. Commercial Banks : Commercial banks all over the world extend foreign currency loans for business purposes. 2. 1. The institutions play on important role as sources of company finance. Shares are parts of the capital of the company. (c) provide direct finance to industry to bridge the gap between demand and supply of long-term and medium-term finance and industrial concerns in both public and private sectors. what are the merits of mendeleev s periodic table - Chemistry - TopperLearning.com | 7sd26fq99. Excessive reserves may make the management wasteful and extravagant. Large retention of earnings over a long period of time may cause dissatisfaction among shareholders as they do not receive the expected rate of dividend. Concept Notes & Videos 295. Those who subscribe to the share capital becomes member of the company and also called shareholders. 1. Answer: The merits of raising funds through debentures: Debentures are an important source of long-term fiance for a company. 5. Demerits: 1. It is rigidly defined. A company with large reserves can face unforeseen contingencies, trade cycles and any other crisis. Merits and Demerits of Accounting Some of the advantages of accounting are Maintenance of business records, Preparation of financial statements , Comparison of results, Decision making, Evidence in legal matters, Provides information to related parties. The prominent financial instruments used for this purpose are : (a)Global Depository Receipts (GDRs) : GDRs are issued to tap the global capital markets by way of global equity offerings. (b) Stages of Formation of a Company. The merits and demerits of harmonic mean are as follows: Merits: 1. 10:00 AM to 7:00 PM IST all days. (2) There is always danger of over capitalisation, if the company goes on retaining profit every year. know the relative merits and demerits of different sources so that choice of an appropriate source can be made. Issue of shares : Issue of shares is the most important source of raising long-term finance. 1. But a dividend on a share can never be paid out of capital. (iv) Positive Connotation. GDRs are non voting equity holdings. The company can not depend on them for long term financing requirements. (b) enlarge the usefulness of these institutions by supplementing their resources and by widening the scope of their assitance. 2. (d) Projects having potential for exports and import substitution. 2020 Zigya Technology Labs Pvt. 4. Debentures can not be issued at discount but a share can be issued at a discount, unless the company satisfies the conditions of section 79 of the Companies Act. Merits or Uses: 1. Interests on debentures is a debt and may be paid even out of capital. State the merits and demerits of public deposits and retained earnings as methods of business finance. Debentures may be secured debentures, insecured debentures convertible debentures and non-convertible debentures. 3. asked Feb 19 in Business Studies by Ranjeet02 (51.4k points) sources of business finance; class-11; 0 votes. Those who invest money in debentures are known as ‘debenture holders’. ADVERTISEMENTS: 3. Some of the advantages of retained earning include. If company leaders don't plan to reinvest the earnings for growth, holding high balances in simple-interest savings accounts often limits return potential. Thus the assets are free to be used as mortgage in future, if need be. Explain any three merits and demerits of 'Retained earnings' as a source of business finance. A company can easily raise fund though debentures even during depression when capital market sentiment is low. (b) Loan capital: debentures. Debentures carry a fixed rate of interest while dividends given to the shareholders may fluctuate from year to year according to the amount of profit. Academic Partner. Merits of Retained earnings 1. Retained earnings meaning, merits and – demerits. 2. CBSE CBSE (Arts) Class 11. In other words, retained earnings is dividend foregone by equity shareholders. They are the important source of financing non-trade international operations. ADVERTISEMENTS: A. 4. ADRs are bought and sold in American markets like regular stocks. Textbook Solutions 7836. Hence, it helps in bringing down the tax liability. 4. 3. Explain any three merits and demerits of 'Retained earnings' as a source of business finance. 4. (c) Evaluation of partnership; merits and demerits. Question 11. It refers to a share in the share capital of the company. It is preferred by investors who want fixed income at lesser risk; 2. Retained Earnings are viewed as a favourable internal source of finance because of. They are the owners of the company. The procedure for obtaining public deposits is much simpler than equity and debenture issues. Retained Earnings. 1 answer. 8.2 MEANING, NATURE AND SIGNIFICANCE OF BUSINESS FINANCE Business is concerned with the production and distribution of goods and services for the satisfaction of needs of society. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion. 2. Debenture holders are creditors of the company. As an internal source, it is more dependable than external sources. (d) locate and fill up gaps in the industrial structure of the country. These claims are the GDRs and such shares are called depository shares. Due to the presence of more than one owner, the partnership firm has the advantage of having more manpower as compared to sole proprietorship firms. As you can see in the statement of Retained Earnings showed earlier, the second figure in it is the net income. (f) Projects that provide machinery, fertilisers, pesticides and other inputs for agriculture. Retained Earnings: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. these rights are not available to the debenture holders. Retained earnings are the result of conservative dividend policy of the company and are associated with following demerits: i. https://www.zigya.com/share/QlNFTjExMDA0Njcy. It gives to greater importance to small items. Article Shared by Pooja Mehta. Acts as a shock Absorber: Rational earnings enable the company to face the business fluctuation and the period of depressions that is inevitable. For carrying out various activities, business requires money. Share with your friends. 2. It is similar to a GDR except that it can be issued to the USA citizens only and can be listed and traded on a stock exchange of USA. 1 answer. Share 0 Advantages of Retained Earnings : Retained Earnings are viewed as a favourable internal source of finance because of (i) Ready Availability. The types of loans and services provided by banks vary from country to country. Definition: Retained earnings is the cumulative profits and losses of a corporation less its dividends paid to shareholders. (3) The management can misuse the funds available as undistributed profit. What advantages does issue of debentures provide over the issue of equity shares ? © created as stockholder claims against the corporation because it has achieved profits The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. Debentures – meaning; kinds of debentures; advantages and disadvantages of debentures. The objectives of the ICICI are to : (a) assist in the promotion expansion and modernisation of induatrial enterprises in the private sector, (b) encourage and promote the participation of private capital, both Indian and foreign and (c) encourage and promote private ownerships of industrial investments and expansion of investment markets. Retained earnings. (ii) High Opportunity Cost. The maturity period is relatively short. Finance, therefore, is called the … 8.2 MEANING, NATUREAND SIGNIFICANCE OF BUSINESS FINANCE Business is concerned with the production and distribution of goods and services for the satisfaction of needs of society. 1. Meaning of retained earnings; Merits and limitations of Retained Earnings; If you would like to contribute notes or other learning material, please submit them using the button below. 4. The depositors may not respond when conditions in the economy are uncertain. It is one of those measures which are rigidity defined. ii. Image: Payback period method – Formula, Merits, Demerits, Suitability. Class 12 Tuition Class 11 Tuition Class 10 Tuition Class 9 Tuition Class 8 Tuition; Class 7 Tuition Class 6 Tuition Class 1 to 5 Tuition Nursery-KG Tuition; College. These bodies were set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. CLASS XI There will be two papers in the subject. Syllabus. Franchisee/Partner … Class-11-Business-Studies, class-11-business-studies-unit-8 Prev ques Next ques Q.4:- State the merits and demerits of public deposits and retained earnings as methods of business finance. It is one of the units into which the share capital of a company can be divided. Merits- 1. Advertisement. It is easiest to calculate and simplest to understand even for a beginner. Delhi - 110058. More Manpower - In a partnership firm, there are more than one owners. (c)Foreign Currency Convertible Bonds (FCCB’s): Foreign currency convertible bonds are equity linked debt securities that are to be converted into equity or depository receipts after a specific period. Use of retained profit does not involve any cost to be incurred for raising the funds,. (a) Joint Stock Company: meaning, features, merits, demerits and objectives. Interest paid on public deposits is tax deductible. Objects : The purpose of IFCI is “to make medium and long-term credits more readily available to industrial concerns in India, particularly incircumstances “Where normal banking accommodation is inappropriate or recourse to capital issue method is impractiable.” The corporation provides financial assistance for the setting up new ventures as well as the modernisation and expansion of existing enterprises. Preference shares - features, types advantages and disadvantages; distinction between equity shares and preference shares. There are no expenses on prospectus, advertising etc.3. 3. There are no expenses on prospectus, advertising etc.3. (b) Projects promoted by new entrepreneurs and technocrats. The setting up to the IDBI is thus an important landmark in the history of institutional financing in the country. Although retained earnings are not noted on the Income Statement, a Statement of Retained Earnings cannot be created without the first one. Debentures are known as creditor securities. Retained earnings carry positive connotation as compared to equity issue as far as stock market is concerned. Random sampling is a method of choosing a sample of observations from a population to make assumptions about the population. The primary types of this sampling are simple random sampling, stratified sampling, cluster sampling, and multistage sampling. Franchisee/Partner Enquiry (North) 8356912811. Improper Utilization of Funds: If the purpose for utilization of retained earnings is not clearly stated, it may lead to careless spending of funds. 5. It is also an undertaking to repay the specified sum with interest to its holder. asked Feb 2 in Business Studies by Ujjawal01 (65.2k points) class-11; 0 votes. Notice I said cumulative. Debentures are more liquid than … Relying on retained earnings eliminates the fear of ownership dilution and loss of control by the existing shareholders. Joint Family Culture in India: Meaning, Characteristics, Merits, Demerits! Need assistance? Even with regard to return of principal, debentures will have prior claim over share capital. Discuss the financial instruments used in international financing. 3. However these are indirect equity offerings and the shares issued. Thus, a holder of FCCB has to option of either converting them into equity shares at a predetermined price or exchange rate, or retaining the bonds. 2. Differences between debentures and shares : 1. Being an internal source, these earnings are readily available to the management and directors don't have to ask outsiders for finance. Long-term sources of funds. (b) American Depository Receipts (ADRs) : The depository receipts issued by a company in the USA are known as American Depository Receipts. In short, GDRs are dollar denominated instruments usually representing a certain number of equity shares denominated in rupees. Public deposits are unsecured. Unlike debentures, no charge is created against the assets and no restrictions are put on the management. (c) Promotion, meaning, role and types of promoters. 8. Preference shares carry a fixed rate of dividend to be paid if there are profits, where as equity shares do not carry a fixed rate of dividend. Ltd. Download books and chapters from book store. Debentures carry a fixed rate of interest. Retained Earnings Definition: The Retained Earnings represent that portion of the equity earnings (left after deducting the tax and preference dividends), which is sacrificed by the equity shareholders and is ploughed back into the firm to reinvest these in the core business operations, such as paying off the debt obligations or purchasing a capital asset. Loans from commercial banksand Financial Institutions - meaning, Equity shares - features, advantages and disadvantages. Download the PDF Question Papers Free for off line practice and view the Solutions online. If the quantum of retained earnings is too high, the management may issue bonus shares to equity shareholders. In other words, it’s the cumulative amount of money left over after all of the expenses and dividends are paid. Also, deposits may be withdrawn whenever the depositors feel shaky about the financial health of the company. 2. The corporation was set up as a privately owned institution but later on the Life Insurance Corporation of India (a statutory corporation) become its major shareholder. Distinction between shares and debentures. 2. Issue of Debentures : A debenture is the instrument of certificate issued by a company to acknowledge is debt. Debentures usually have a charge on the assets of the company as distinguished from shares which have no such charge. Explain the merits and demerits of raising funds through debentures. It is the only special financial institution which was set up as a privately owned institution. 2. 4. For carrying out various activities, business requires money. 2. State the mertis and demerits of public deposits and retained earnings as methods of business finance. 3. (ii) Cheaper than External Equity. Write a short note on (a) Retained earnings (b) Trade credit. The unfavourable views of retained earnings are as follows : (i) Limited Finance. The retained earnings are nothing but sacrifice of profits made by equity shareholders. Use of retained profit does not involve any cost to be incurred for raising the funds,. It gives us the total picture of the problem even with a single glance. Interest on debentures is payable whether there are profit or not, but dividends on share are paid only where the company had earned profits. 2. Debentures constitute loan to the company. The amount which can be raised by way of retained earnings will be limited to an extent only. There is no fixed commitment to pay dividend on such funds. Public deposits are an uncertain and unreliable source of finance. Debentures do not carry voting rights, and therefore, debenture holders are not in position to exercise any control over the affairs of the company. Objectives : (a) co-ordinate, regulate and supervise the activities of all financial institutions providing long-term finance to industry. Besides, they also assist companies to raise funds from other sources. Keeping in view a stable dividend policy, the directors can't exhaust the whole balance retained. The continuously growing retained earnings show that company is making profit and building good fundamentals. Payment of fixed interest on debentures shall be made prior to payment of any dividend to the shareholders out of the profits of the company. Retained earnings are cheaper than external equity because the floatation costs, brokerage costs, underwriting commission are other issue expenses are eliminated. Important Solutions 12. 3. International Capital Markets : Modern organisations including multinational companies depend upon sizeable borrowings in rupees as well as in foreign currency. These bodies provide long and medium term loans and grants promote to development economically backward areas in the world. 7. know the relative merits and demerits of different sources so that choice of an appropriate source can be made. Education Franchise × Contact Us. Retained earnings have the following four components: Last Year Reserves: as we know, retained earnings is a cumulative part of net profit means every year company makes profit and retains a portion of it rather than distributing. It is international both in ownership and operation. Copyright © 2020 Applect Learning Systems Pvt. (c) Loans from commercial banks and Financial Institutions. There is no fixed commitment to pay dividend on such funds. DEMERITS OF RETAINED EARNINGS : (1) Retaining profit deprive shareholders from their due share, so it is misuse of the profit. Shareholders as members of the company, enjoy right to yote in general meetings and thus, can exercise control over the management of the company. It may issue them by investing in unprofitable or undesirable channels. This method is also known as pay out, pay off or recoupment period method. 6. Loans from financial institutions : A number of financial institutions have been set up by government with the main object of promoting industrial development. Differentiate between Shares and Debentures. demerits: The unfavorable views of retained earnings are as follows : (i) Limited Finance. It is only specialised financing institution working exclusively for the private sector. As an internal source, it is more dependable than external sources. The management of a company may not always use the retained earnings in the best interest of shareholders. This bank receives dividends, notices and reports and issues negotiable certificates as claims against these shares. Ltd. All rights reserved. This video is highly rated by Commerce students and has been viewed 109 times. Merits and Demerits of Harmonic Mean. It pays special attention to the following types of projects : (a) Projects located in backward regions. Self-explanatory (iv) Corporate Organizations. Bonus and rights issue, ESOP and Sweat Equity Shares - meaning. It was set up as a statutory corporation under Industrial Development Bank of India Act, 1964. asked Aug 1, 2018 in Business Studies by Sakil Alam ( 64.0k points) sources of business finance It is capable of further algebraic treatment. 4.Optimal Capital Structure A capital structure is said to be optimal when the proportion of debt and equity is such that it results in the increase of shareholders’ wealth. As a result, the … Two types of shares may be issued : (i) Preference shares and (ii) Equity shares. Question Bank Solutions 6793. Contact. State the merits and demerits of public deposits and retained earnings as methods of business finance. Since, use of equity and debt in the capital structure has both its merits and demerits, a judicious mix of both are used in the capital structure. 1. Class-11-commerce » BBA. For the first time in INDIA, textbook in Economics, Accountancy & Business Studies with FREE Video Lectures by Eminent Authors/Subject Expert. 1800-212-7858 / 9372462318. Understanding Payback Period method.

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