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Discuss any four advantages of ploughing back of profits from the company’s point of view. |
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Answer» Ploughing back of profits from the company’s point of view offers the following benefits: • It is the most convenient and economical method of finance, no legal formalities are involved and no negotiations are to be made. No return is to be paid on retained earnings and no fixed obligations are created. • The financial structure of the company remains fully flexible. No charge is created against the assets and no restrictions are put on the freedom of management to raise further finance by floating new securities in the market. • Ploughing back of profits adds to the financial strength and creditworthiness of the company. A company with large reserves can face unforeseen contingencies and trade cycles with ease and economy. • Retained earnings can be used to redeem debts and to replace obsolete assets. A company with large reserves can take advantage of business opportunities. |
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