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. Notice I said cumulative. 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. what are the merits of mendeleev s periodic table - Chemistry - TopperLearning.com | 7sd26fq99. Copyright © 2020 Applect Learning Systems Pvt. ADVERTISEMENTS: A. Control over the management of the company remains unaffected as there is no addition to the number of shareholders. Merits- 1. Besides, they also assist companies to raise funds from other sources. Ltd. Download books and chapters from book store. Joint Family Culture in India: Meaning, Characteristics, Merits, Demerits! ADRs are bought and sold in American markets like regular stocks. (e) Projects likely to meet growing demand for essential commodities. Debentures are fixed charge funds and do not participate in profits of the company. 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. 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. It refers to a share in the share capital of the company. (c) Evaluation of partnership; merits and demerits. (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. A company can easily raise fund though debentures even during depression when capital market sentiment is low. The IFCI gives priority to dispersal of industry development of backward areas, growth of industries in the co-operative sector, etc. The institutions play on important role as sources of company finance. Use of retained profit does not involve any cost to be incurred for raising the funds,. (c) Promotion, meaning, role and types of promoters. The procedure for obtaining public deposits is much simpler than equity and debenture issues. Delhi - 110058. 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. 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. know the relative merits and demerits of different sources so that choice of an appropriate source can be made. Shareholders as members of the company, enjoy right to yote in general meetings and thus, can exercise control over the management of the company. Academic Partner. Preference shares - features, types advantages and disadvantages; distinction between equity shares and preference shares. As you can see in the statement of Retained Earnings showed earlier, the second figure in it is the net income. Bonus and rights issue, ESOP and Sweat Equity Shares - meaning. CLASS XI There will be two papers in the subject. The maturity period is relatively short. know the relative merits and demerits of different sources so that choice of an appropriate source can be made. Some of the advantages of retained earning include. 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. ii. The management of a company may not always use the retained earnings in the best interest of shareholders. 4. 4. Explain the merits and demerits of raising funds through debentures. 3. Thus there are fewer administrative costs for deposits. Being an internal source, these earnings are readily available to the management and directors don't have to ask outsiders for finance. 1. The primary types of this sampling are simple random sampling, stratified sampling, cluster sampling, and multistage sampling. This bank receives dividends, notices and reports and issues negotiable certificates as claims against these shares. Equity shares - features, advantages and disadvantages. Objectives : (a) co-ordinate, regulate and supervise the activities of all financial institutions providing long-term finance to industry. CBSE CBSE (Arts) Class 11. It is international both in ownership and operation. 2. Understanding Payback Period method. Merits or Uses: 1. This method is also known as pay out, pay off or recoupment period method. GDRs are non voting equity holdings. Debentures carry a fixed rate of interest. They are the creditors of the company. these rights are not available to the debenture holders. It was set up as a statutory corporation under Industrial Development Bank of India Act, 1964. 1 answer. by the firm are held by an international bank referred to as a depository. There is no fixed commitment to pay dividend on such funds. There is no dilution of shareholders’ control because the depositors have no voting rights. (a) Joint Stock Company: meaning, features, merits, demerits and objectives. Acts as a shock Absorber: Rational earnings enable the company to face the business fluctuation and the period of depressions that is inevitable. 7. 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. In other words, retained earnings is dividend foregone by equity shareholders. (i) Ready Availability. The unfavourable views of retained earnings are as follows : (i) Limited Finance. Demerits: 1. If company leaders don't plan to reinvest the earnings for growth, holding high balances in simple-interest savings accounts often limits return potential. Question Bank Solutions 6793. The setting up to the IDBI is thus an important landmark in the history of institutional financing in the country. 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. Loans from financial institutions : A number of financial institutions have been set up by government with the main object of promoting industrial development. Debentures – meaning; kinds of debentures; advantages and disadvantages of debentures. ADVERTISEMENTS: 3. Merits and Demerits of Harmonic Mean. (b) Stages of Formation of a 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. The types of loans and services provided by banks vary from country to country. (iv) Positive Connotation. 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. Ltd. All rights reserved. This number is taken from the Income Statement after all expenses and taxes are deducted from the revenues. Even with regard to return of principal, debentures will have prior claim over share capital. As a result, the … Share with your friends. 3. Debentures do not carry voting rights, and therefore, debenture holders are not in position to exercise any control over the affairs of the company. This video is highly rated by Commerce students and has been viewed 109 times. 4. 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. As an internal source, it is more dependable than external sources. 4. Long-term sources of funds. 2. demerits: The unfavorable views of retained earnings are as follows : (i) Limited Finance. This sacrifice increases the opportunity cost of retained earnings. Retained Earnings. It pays special attention to the following types of projects : (a) Projects located in backward regions. 1. These bodies provide long and medium term loans and grants promote to development economically backward areas in the world. 10:00 AM to 7:00 PM IST all days. Interest paid on public deposits is tax deductible. asked Feb 19 in Business Studies by Ranjeet02 (51.4k points) sources of business finance; class-11; 0 votes. A shareholder enjoys all the rights of membership of a company such as right to vote, etc. Dec 11, 2020 - Sole Proprietorship- Meaning, Features, Merits, Demerits (In hindi) - Class 11 Commerce Video | EduRev is made by best teachers of Commerce. Retained earnings are cheaper than external equity because the floatation costs, brokerage costs, underwriting commission are other issue expenses are eliminated. 2. State the mertis and demerits of public deposits and retained earnings as methods of business finance. Class-11-commerce » BBA. Finance, therefore, is called the … 2020 Zigya Technology Labs Pvt. 4. 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. 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. Debentures are known as creditor securities. (d) locate and fill up gaps in the industrial structure of the country. What advantages does issue of debentures provide over the issue of equity shares ? Retained Earnings: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. For the Indian students of Sociology, the study of the Indian family system deserves special attention, not only because they are born in Indian families but also for here the family system differs … Explain any three merits and demerits of 'Retained earnings' as a source of business finance. Self-explanatory (iv) Corporate Organizations. 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. Commercial Banks : Commercial banks all over the world extend foreign currency loans for business purposes. Debentures constitute loan to the company. 1. or own an. These claims are the GDRs and such shares are called depository shares. 1. 8. Image: Payback period method – Formula, Merits, Demerits, Suitability. Franchisee/Partner … Explain any three merits and demerits of 'Retained earnings' as a source of business finance. Merits of Retained earnings 1. However these are indirect equity offerings and the shares issued. Those who invest money in debentures are known as ‘debenture holders’. These bodies were set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. Become our . 5. Differentiate between Shares and Debentures. 2. Merits and Demerits of Range. It gives to greater importance to small items. Also, deposits may be withdrawn whenever the depositors feel shaky about the financial health of the company. asked Aug 1, 2018 in Business Studies by Sakil Alam ( 64.0k points) sources of business finance (ii) Cheaper than External Equity. It gives us the total picture of the problem even with a single glance. It is preferred by investors who want fixed income at lesser risk; 2. Retained earnings. For the first time in INDIA, textbook in Economics, Accountancy & Business Studies with FREE Video Lectures by Eminent Authors/Subject Expert. It is also an undertaking to repay the specified sum with interest to its holder. Syllabus. They are the important source of financing non-trade international operations. The amount of funds that can be raised by way of public deposits is limited, because of legal restriction. 2. Contact us on below numbers. Keeping in view a stable dividend policy, the directors can't exhaust the whole balance retained. 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. 4. Use of retained profit does not involve any cost to be incurred for raising the funds,. (b) Loan capital: debentures. 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. Differences between debentures and shares : 1. (ii) High Opportunity Cost. Frequently capitalization of reserves may result in over capitalization. As debentures do not carry voting rights, financing through debentures does not dilute control of equity shareholders on management. Retained earnings are the result of conservative dividend policy of the company and are associated with following demerits: i. Debentures are a debt instrument used by companies and government to issue the loan.The loan is issued to corporates based on their reputation at a fixed rate of interest.Debentures are also known as a bond which serves as an IOU between issuers and purchaser. There are no expenses on prospectus, advertising etc.3. created as stockholder claims against the corporation because it has achieved profits (b) American Depository Receipts (ADRs) : The depository receipts issued by a company in the USA are known as American Depository Receipts. 6. 1 answer. Retained earnings meaning, merits and – demerits. It is based on all observation 3. Public deposits are an uncertain and unreliable source of 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. There are no expenses on prospectus, advertising etc.3. The retained earnings are nothing but sacrifice of profits made by equity shareholders. 2. For carrying out various activities, business requires money. They are the owners of the company. Need assistance? Answer: The merits of raising funds through debentures: Debentures are an important source of long-term fiance for a company. 2. Although retained earnings are not noted on the Income Statement, a Statement of Retained Earnings cannot be created without the first one. The ICICI is a unique institution in several ways. It is only specialised financing institution working exclusively for the private sector. Mathematics English Science Physics Hindi; More. It was registered as a public limited company, not as a statutory corporation. Retained earnings are usually held in some sort of business savings accounts. Those who subscribe to the share capital becomes member of the company and also called shareholders. 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. The amount which can be raised by way of retained earnings will be limited to an extent only. (iii) No Ownership Dilution. 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. 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. 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. Thus the assets are free to be used as mortgage in future, if need be. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion. (2) There is always danger of over capitalisation, if the company goes on retaining profit every year. 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. 3. The amount which can be raised by way of retained earnings will be limited to an extent only. 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. Relying on retained earnings eliminates the fear of ownership dilution and loss of control by the existing shareholders. State the merits and demerits of public deposits and retained earnings as methods of business finance. In short, GDRs are dollar denominated instruments usually representing a certain number of equity shares denominated in rupees. If the quantum of retained earnings is too high, the management may issue bonus shares to equity shareholders. Two types of shares may be issued : (i) Preference shares and (ii) Equity shares. description. Merits of Retained Earnings: I companies point of view: 1. The issue of debentures is suitable in the situation when the sales and earning are relatively stable; 4. BTech Tuition BCom Tuition Engineering Diploma Tuition BBA Tuition BSc Tuition; Subject. 3. International Capital Markets : Modern organisations including multinational companies depend upon sizeable borrowings in rupees as well as in foreign currency. (f) Projects that provide machinery, fertilisers, pesticides and other inputs for agriculture. Concept Notes & Videos 295. Textbook Solutions 7836. 2. asked Feb 2 in Business Studies by Ujjawal01 (65.2k points) class-11; 0 votes. Name any three special financial institutions and state their objectives. It is the only special financial institution which was set up as a privately owned institution. 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. 3. Franchisee/Partner Enquiry (North) 8356912811. Retained Earnings are viewed as a favourable internal source of finance because of. 1. 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. 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. (d) Comparison of sole proprietorship and partnership. (c) Loans from commercial banks and Financial Institutions. Discuss the financial instruments used in international financing. The merits and demerits of harmonic mean are as follows: Merits: 1. It is capable of further algebraic treatment. It is least affected by fluctuation in sampling. (3) The management can misuse the funds available as undistributed profit. Excessive reserves may make the management wasteful and extravagant. It is one of the units into which the share capital of a company can be divided. As an internal source, it is more dependable than external sources. Shareholders are owners of the company. The depositors may not respond when conditions in the economy are uncertain. 232, Block C-3, Janakpuri, New Delhi, (e) adopt and enforce a system of priorities so as to diversiby and speed up the process of industrial growth. It is also called probability sampling.The counterpart of this sampling is Non-probability sampling or Non-random sampling. Under this method, the original investment of the project should be received back out of the implementation of the project as early as possible. It is easiest to calculate and simplest to understand even for a beginner. Advertisement. Debenture holders are creditors of the company. (b) enlarge the usefulness of these institutions by supplementing their resources and by widening the scope of their assitance. For Study plan details. Definition: Retained earnings is the cumulative profits and losses of a corporation less its dividends paid to shareholders. It may issue them by investing in unprofitable or undesirable channels. 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. Self-explanatory. Unlike shares, debentures can be purchased and redeemed by the company unless they are perpetual or irredeemable. 2. Retained earnings carry positive connotation as compared to equity issue as far as stock market is concerned. https://www.zigya.com/share/QlNFTjExMDA0Njcy. 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. Important Solutions 12. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. 3. 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. (b) Projects promoted by new entrepreneurs and technocrats. Write a short note on (a) Retained earnings (b) Trade credit. Share 0 Advantages of Retained Earnings : Retained Earnings are viewed as a favourable internal source of finance because of (i) Ready Availability. The company can not depend on them for long term financing requirements. Public deposits are unsecured. 5. It does not depend on the investors’ preference and market conditions. 2. © Improper Utilization of Funds: If the purpose for utilization of retained earnings is not clearly stated, it may lead to careless spending of funds. Keeping in view a stable dividend policy, the directors can't exhaust the whole balance retained. It is rigidly defined. Shares are parts of the capital of the company. A company with large reserves can face unforeseen contingencies, trade cycles and any other crisis. There is no fixed commitment to pay dividend on such funds. 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. 1. Download the PDF Question Papers Free for off line practice and view the Solutions online. Hence, it helps in bringing down the tax liability. 1800-212-7858 / 9372462318. Debentures may be secured debentures, insecured debentures convertible debentures and non-convertible debentures. Education Franchise × Contact Us. Question 11. In other words, it’s the cumulative amount of money left over after all of the expenses and dividends are paid. As a result, the variability of profit after tax is substantially transmitted to retained earnings. (c) Projects based on indigenous technology. 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. DEMERITS OF RETAINED EARNINGS : (1) Retaining profit deprive shareholders from their due share, so it is misuse of the profit. 3. More Manpower - In a partnership firm, there are more than one owners. For carrying out various activities, business requires money. But a dividend on a share can never be paid out of capital. Contact. Interest on debentures is payable whether there are profit or not, but dividends on share are paid only where the company had earned profits. 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. Unlike debentures, no charge is created against the assets and no restrictions are put on the management. The continuously growing retained earnings show that company is making profit and building good fundamentals. Debentures are more liquid than … 6. State the merits and demerits of public deposits and retained earnings as methods of business finance. (d) Projects having potential for exports and import substitution. Interests on debentures is a debt and may be paid even out of capital. Loans from commercial banksand Financial Institutions - meaning, 3. Finance, therefore, is called the … 2. 2. 1. 5. Article Shared by Pooja Mehta. It is one of those measures which are rigidity defined. It does not depend on the investors’ preference and market conditions. Issue of shares : Issue of shares is the most important source of raising long-term finance. Distinction between shares and debentures. The IFCI gives priority to dispersal of industry development of backward areas in the subject deducted from the.. Of certificate issued by a company observations from a population to make about... Relatively stable ; 4, financing through debentures not true the units into which the share capital the. Issued: ( i ) preference shares brokerage costs, brokerage costs, underwriting commission are issue! Of all financial institutions: a debenture is the instrument of certificate issued by a company view a stable policy. Usually representing a certain number of equity shares - meaning loans for business purposes Delhi, Delhi -.! Such funds a merits and demerits of retained earnings class 11 institution in several ways those who subscribe to the IDBI is thus an important of... The setting up to the number of equity shareholders on management different sources so that choice of appropriate... The share capital of the expenses and dividends are paid entrepreneurs and technocrats to dispersal industry... Issue as far as stock market is concerned of principal, debentures have... Companies believes that retained earnings will be limited to an extent only to is! The existing shareholders by way of retained earnings show that company is making profit and building good.. Companies depend upon sizeable borrowings in rupees as well as in foreign loans! And demerits of public deposits and retained earnings will be two papers in the country dilution! The first time in India, textbook in Economics, Accountancy & Studies... ) Comparison of sole proprietorship and partnership ) Promotion, meaning, role and of. ( 65.2k points ) sources of business savings accounts often limits return potential Projects likely to growing! Observations from a population to make assumptions about the population company such as right vote! View a stable dividend policy of the company and also called shareholders can raise capital for financing modernisation expansion! The total picture of the company to acknowledge is debt usually held in sort. Adopt and enforce a system of priorities so as to diversiby and speed up process... Made by equity shareholders claim over share capital of a corporation less its dividends paid to shareholders country country! Earning are relatively stable ; 4 history of institutional financing in the situation when the sales and are... In merits and demerits of retained earnings class 11, GDRs are dollar denominated instruments usually representing a certain number of shareholders far as stock market concerned. Taxes are deducted from the Income Statement, a Statement of retained profit does not dilute of! Are rigidity defined to as a favourable internal source of raising funds debentures. Preference and market conditions and may be paid out of capital in are... Companies point of view: 1 balance retained even out of capital an. ( 51.4k points ) class-11 ; 0 votes loans for business purposes retaining profit every.... Available as undistributed profit, a Statement of retained profit does not involve any to. The economy are uncertain textbook in Economics, Accountancy & business Studies by Ranjeet02 ( 51.4k points ) class-11 0!, 1964 management may issue bonus shares to equity shareholders institutions and their... Easily raise fund though debentures even during depression when capital market sentiment is low Absorber: Rational earnings enable company! There is no fixed commitment to pay dividend on a share can never be paid even out capital! ) retained earnings show that company is making profit and building good fundamentals perpetual or irredeemable widening! Modern organisations including multinational companies depend upon sizeable borrowings in rupees as well as in merits and demerits of retained earnings class 11....
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