There are no expenses on prospectus, advertising etc.3. But a dividend on a share can never be paid out of capital. It does not depend on the investors’ preference and market conditions. created as stockholder claims against the corporation because it has achieved profits More Manpower - In a partnership firm, there are more than one owners. Debentures do not carry voting rights, and therefore, debenture holders are not in position to exercise any control over the affairs of the company. 4. There is no fixed commitment to pay dividend on such funds. They are the creditors of the company. It is only specialised financing institution working exclusively for the private sector. The setting up to the IDBI is thus an important landmark in the history of institutional financing in the country. 10:00 AM to 7:00 PM IST all days. Loans from financial institutions : A number of financial institutions have been set up by government with the main object of promoting industrial development. Improper Utilization of Funds: If the purpose for utilization of retained earnings is not clearly stated, it may lead to careless spending of funds. Download the PDF Question Papers Free for off line practice and view the Solutions online. Bonus and rights issue, ESOP and Sweat Equity Shares - meaning. 3. Also, deposits may be withdrawn whenever the depositors feel shaky about the financial health of the company. The company can not depend on them for long term financing requirements. It is least affected by fluctuation in sampling. The types of loans and services provided by banks vary from country to country. 3. 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. 1. Self-explanatory (iv) Corporate Organizations. Use of retained profit does not involve any cost to be incurred for raising the funds,. 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. Explain the merits and demerits of raising funds through debentures. Retained earnings are usually held in some sort of business savings accounts. (e) Projects likely to meet growing demand for essential commodities. ii. BTech Tuition BCom Tuition Engineering Diploma Tuition BBA Tuition BSc Tuition; Subject. 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. As a result, the … Share with your friends. 1. Class-11-commerce » BBA. For carrying out various activities, business requires money. Debenture holders are creditors of the company. 3. (c) Loans from commercial banks and Financial Institutions. Shareholders as members of the company, enjoy right to yote in general meetings and thus, can exercise control over the management of the company. Unlike shares, debentures can be purchased and redeemed by the company unless they are perpetual or irredeemable. 232, Block C-3, Janakpuri, New Delhi, 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. Delhi - 110058. Under the retained earnings sources of finance, a part of the total profits is transferred to various reserves such as general reserve, replacement fund, reserve for repairs and renewals, reserve funds and secrete reserves, etc. This video is highly rated by Commerce students and has been viewed 109 times. 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. If the quantum of retained earnings is too high, the management may issue bonus shares to equity shareholders. Even with regard to return of principal, debentures will have prior claim over share capital. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. Unlike debentures, no charge is created against the assets and no restrictions are put on the management. 1 answer. Debentures may be secured debentures, insecured debentures convertible debentures and non-convertible debentures. 7. Education Franchise × Contact Us. Debentures usually have a charge on the assets of the company as distinguished from shares which have no such charge. Write a short note on (a) Retained earnings (b) Trade credit. DEMERITS OF RETAINED EARNINGS : (1) Retaining profit deprive shareholders from their due share, so it is misuse of the profit. The merits and demerits of harmonic mean are as follows: Merits: 1. by the firm are held by an international bank referred to as a depository. It is the only special financial institution which was set up as a privately owned institution. (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. For Study plan details. As a result, the variability of profit after tax is substantially transmitted to retained earnings. 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. Academic Partner. (b) American Depository Receipts (ADRs) : The depository receipts issued by a company in the USA are known as American Depository Receipts. 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. Finance, therefore, is called the … This method is also known as pay out, pay off or recoupment period method. It was registered as a public limited company, not as a statutory corporation. A shareholder enjoys all the rights of membership of a company such as right to vote, etc. 1. Answer: The merits of raising funds through debentures: Debentures are an important source of long-term fiance for a company. The maturity period is relatively short. Syllabus. Share 0 Advantages of Retained Earnings : Retained Earnings are viewed as a favourable internal source of finance because of (i) Ready Availability. Differences between debentures and shares : 1. Merits of Retained Earnings: I companies point of view: 1. 4. Copyright © 2020 Applect Learning Systems Pvt. 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. Joint Family Culture in India: Meaning, Characteristics, Merits, Demerits! Although retained earnings are not noted on the Income Statement, a Statement of Retained Earnings cannot be created without the first one. ADRs are bought and sold in American markets like regular stocks. The amount of funds that can be raised by way of public deposits is limited, because of legal restriction. 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. (d) Projects having potential for exports and import substitution. (c) Promotion, meaning, role and types of promoters. The Bank represent an attempt to combine in a single institution the requirements of and expanding economy and need for a coordinate approach to industrial financing. It is rigidly defined. Insustrial Development Bank of India (IDBI) : The Industrial Development Bank of India was set up as an apex institution and it started its operations with effect from July 1, 1964. Explain any three merits and demerits of 'Retained earnings' as a source of business finance. It is also called probability sampling.The counterpart of this sampling is Non-probability sampling or Non-random sampling. Public deposits are an uncertain and unreliable source of finance. Relying on retained earnings eliminates the fear of ownership dilution and loss of control by the existing shareholders. The amount which can be raised by way of retained earnings will be limited to an extent only. https://www.zigya.com/share/QlNFTjExMDA0Njcy. description. (a) Joint Stock Company: meaning, features, merits, demerits and objectives. It is one of the units into which the share capital of a company can be divided. 2. State the merits and demerits of public deposits and retained earnings as methods of business finance. These bodies were set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. The retained earnings are nothing but sacrifice of profits made by equity shareholders. (b) Loan capital: debentures. asked Feb 19 in Business Studies by Ranjeet02 (51.4k points) sources of business finance; class-11; 0 votes. Objectives : (a) co-ordinate, regulate and supervise the activities of all financial institutions providing long-term finance to industry. Question Bank Solutions 6793. Merits of Retained earnings 1. Merits or Uses: 1. Under this method, the original investment of the project should be received back out of the implementation of the project as early as possible. The IFCI gives priority to dispersal of industry development of backward areas, growth of industries in the co-operative sector, etc. 2. (ii) Cheaper than External Equity. 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. 2. International Agencies and Development Banks : A number of international agencies and development banks have emerged over the years to finance international trade and business. It is capable of further algebraic treatment. 2. They are the owners of the company. Long-term sources of funds. Keeping in view a stable dividend policy, the directors can't exhaust the whole balance retained. Debentures carry a fixed rate of interest. (2) There is always danger of over capitalisation, if the company goes on retaining profit every year. (b) enlarge the usefulness of these institutions by supplementing their resources and by widening the scope of their assitance. However these are indirect equity offerings and the shares issued. Image: Payback period method – Formula, Merits, Demerits, Suitability. 5. Debentures are known as creditor securities. Discuss the financial instruments used in international financing. 2. Issue of Debentures : A debenture is the instrument of certificate issued by a company to acknowledge is debt. Thus there are fewer administrative costs for deposits. It does not depend on the investors’ preference and market conditions. Distinction between shares and debentures. Explain any three merits and demerits of 'Retained earnings' as a source of business finance. 1800-212-7858 / 9372462318. (c) Projects based on indigenous technology. (iii) No Ownership Dilution. Interests on debentures is a debt and may be paid even out of capital. A company with large reserves can face unforeseen contingencies, trade cycles and any other crisis. Public deposits are unsecured. Keeping in view a stable dividend policy, the directors can't exhaust the whole balance retained. The amount which can be raised by way of retained earnings will be limited to an extent only. or own an. It may issue them by investing in unprofitable or undesirable channels. It refers to a share in the share capital of the company. Textbook Solutions 7836. know the relative merits and demerits of different sources so that choice of an appropriate source can be made. In short, GDRs are dollar denominated instruments usually representing a certain number of equity shares denominated in rupees. It is based on all observation 3. State the merits and demerits of public deposits and retained earnings as methods of business finance. Besides, they also assist companies to raise funds from other sources. asked Feb 2 in Business Studies by Ujjawal01 (65.2k points) class-11; 0 votes. Self-explanatory. Thus the assets are free to be used as mortgage in future, if need be. It is one of those measures which are rigidity defined. CBSE CBSE (Arts) Class 11. 8. 1. The continuously growing retained earnings show that company is making profit and building good fundamentals. Preference shares - features, types advantages and disadvantages; distinction between equity shares and preference shares. The depositors may not respond when conditions in the economy are uncertain. 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. Concept Notes & Videos 295. Random sampling is a method of choosing a sample of observations from a population to make assumptions about the population. (b) Projects promoted by new entrepreneurs and technocrats. (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. (d) locate and fill up gaps in the industrial structure of the country. Commercial Banks : Commercial banks all over the world extend foreign currency loans for business purposes. asked Aug 1, 2018 in Business Studies by Sakil Alam ( 64.0k points) sources of business finance (3) The management can misuse the funds available as undistributed profit. 2. Control over the management of the company remains unaffected as there is no addition to the number of shareholders. (e) adopt and enforce a system of priorities so as to diversiby and speed up the process of industrial growth. know the relative merits and demerits of different sources so that choice of an appropriate source can be made. what are the merits of mendeleev s periodic table - Chemistry - TopperLearning.com | 7sd26fq99. demerits: The unfavorable views of retained earnings are as follows : (i) Limited Finance. 1 answer. Article Shared by Pooja Mehta. Profit re-invested as retained earnings is profit that could have been paid as a dividend. Retained earnings add to the financial strength and improved credibility of the company. 5. 5. Financing through debentures is less costly as compared to cost of preference or equity capital as the interest payment on debentures is tax deductibel. Retained earnings meaning, merits and – demerits. For carrying out various activities, business requires money. Some of the advantages of retained earning include. In other words, retained earnings is dividend foregone by equity shareholders. 4. This bank receives dividends, notices and reports and issues negotiable certificates as claims against these shares. Those who subscribe to the share capital becomes member of the company and also called shareholders. 2. This sacrifice increases the opportunity cost of retained earnings. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion. Franchisee/Partner Enquiry (North) 8356912811. Notice I said cumulative. 4. The institutions play on important role as sources of company finance. Merits and Demerits of Range. As you can see in the statement of Retained Earnings showed earlier, the second figure in it is the net income. Franchisee/Partner … Industrial Credit and Investment Corporation of India (ICICI) : The ICICI was set up on January 5, 1955 as a public limited company under the Company Act. A company can easily raise fund though debentures even during depression when capital market sentiment is low. The issue of debentures is suitable in the situation when the sales and earning are relatively stable; 4. Two types of shares may be issued : (i) Preference shares and (ii) Equity shares. It was set up as a statutory corporation under Industrial Development Bank of India Act, 1964. What advantages does issue of debentures provide over the issue of equity shares ? (iv) Positive Connotation. Ltd. Download books and chapters from book store. 3. It is also an undertaking to repay the specified sum with interest to its holder. State the mertis and demerits of public deposits and retained earnings as methods of business finance. 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.