1.

Explain briefly the merits of retained earnings as sources of business finance.

Answer»

Company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as retained earnings.

Merits:

  • Retained earnings is a permanent source of funds available to an organisation. 
  • It does not involve any explicit cost in the form of interest, dividend or float at ion cost. 
  • As the funds are generated internally, there is a greater degree of operational freedom and flexibility. 
  • It enhances the capacity of the business to absorb unexpected losses. 
  • It may lead to increase in the market price of the equity shares of a company.


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