Some of the advantages of retained earning include. Two types of shares may be issued : (i) Preference shares and (ii) Equity shares. 4. 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. For carrying out various activities, business requires money. 1. Education Franchise × Contact Us. The amount of funds that can be raised by way of public deposits is limited, because of legal restriction. (d) locate and fill up gaps in the industrial structure of the country. Profit re-invested as retained earnings is profit that could have been paid as a dividend. It is one of those measures which are rigidity defined. (iii) No Ownership Dilution. 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. Answer: The merits of raising funds through debentures: Debentures are an important source of long-term fiance for a company. In other words, it’s the cumulative amount of money left over after all of the expenses and dividends are paid. 2. A shareholder enjoys all the rights of membership of a company such as right to vote, etc. Excessive reserves may make the management wasteful and extravagant. Debentures are known as creditor securities. State the merits and demerits of public deposits and retained earnings as methods of business finance. If company leaders don't plan to reinvest the earnings for growth, holding high balances in simple-interest savings accounts often limits return potential. Keeping in view a stable dividend policy, the directors can't exhaust the whole balance retained. Debentures are more liquid than … 2. Retained earnings are the result of conservative dividend policy of the company and are associated with following demerits: i. 2020 Zigya Technology Labs Pvt. 2. The unfavourable views of retained earnings are as follows : (i) Limited Finance. (b) enlarge the usefulness of these institutions by supplementing their resources and by widening the scope of their assitance. 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. (d) Comparison of sole proprietorship and partnership. Debentures – meaning; kinds of debentures; advantages and disadvantages of debentures. Become our . Long-term sources of funds. 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. Use of retained profit does not involve any cost to be incurred for raising the funds,. 8. 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. It is international both in ownership and operation. 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. asked Aug 1, 2018 in Business Studies by Sakil Alam ( 64.0k points) sources of business finance (i) Ready Availability. Debentures usually have a charge on the assets of the company as distinguished from shares which have no such charge. 2. Even with regard to return of principal, debentures will have prior claim over share capital. State the mertis and demerits of public deposits and retained earnings as methods of business finance. As an internal source, it is more dependable than external sources. The IFCI gives priority to dispersal of industry development of backward areas, growth of industries in the co-operative sector, etc. Understanding Payback Period method. It is also an undertaking to repay the specified sum with interest to its holder. Notice I said cumulative. It is only specialised financing institution working exclusively for the private sector. (b) American Depository Receipts (ADRs) : The depository receipts issued by a company in the USA are known as American Depository Receipts. Retained earnings are cheaper than external equity because the floatation costs, brokerage costs, underwriting commission are other issue expenses are eliminated. Relying on retained earnings eliminates the fear of ownership dilution and loss of control by the existing shareholders. Use of retained profit does not involve any cost to be incurred for raising the funds,. The depositors may not respond when conditions in the economy are uncertain. asked Feb 19 in Business Studies by Ranjeet02 (51.4k points) sources of business finance; class-11; 0 votes. Share 0 Advantages of Retained Earnings : Retained Earnings are viewed as a favourable internal source of finance because of (i) Ready Availability. Contact us on below numbers. It is easiest to calculate and simplest to understand even for a beginner. description. created as stockholder claims against the corporation because it has achieved profits Commercial Banks : Commercial banks all over the world extend foreign currency loans for business purposes. As a result, the variability of profit after tax is substantially transmitted to retained earnings. There is no dilution of shareholders’ control because the depositors have no voting rights. Concept Notes & Videos 295. 7. There are no expenses on prospectus, advertising etc.3. 2. Self-explanatory (iv) Corporate Organizations. 2. CBSE CBSE (Arts) Class 11. Debentures are fixed charge funds and do not participate in profits of the company. Share with your friends. More Manpower - In a partnership firm, there are more than one owners. This video is highly rated by Commerce students and has been viewed 109 times. Need assistance? 1. 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. Differences between debentures and shares : 1. 1800-212-7858 / 9372462318. It is least affected by fluctuation in sampling. 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. what are the merits of mendeleev s periodic table - Chemistry - TopperLearning.com | 7sd26fq99. Shareholders are owners of the company. Bonus and rights issue, ESOP and Sweat Equity Shares - meaning. The company can not depend on them for long term financing requirements. These bodies were set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. Retained Earnings: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Distinction between shares and debentures. Unlike debentures, no charge is created against the assets and no restrictions are put on the management. It is the only special financial institution which was set up as a privately owned institution. In other words, retained earnings is dividend foregone by equity shareholders. Discuss the financial instruments used in international financing. It is based on all observation 3. Debentures carry a fixed rate of interest. 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. 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. Equity shares - features, advantages and disadvantages. 6. 2. GDRs are non voting equity holdings. Those who subscribe to the share capital becomes member of the company and also called shareholders. 1. Textbook Solutions 7836. Public deposits are an uncertain and unreliable source of finance. Franchisee/Partner Enquiry (North) 8356912811. Debentures do not carry voting rights, and therefore, debenture holders are not in position to exercise any control over the affairs of the company. 2. 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. ADVERTISEMENTS: 3. Download the PDF Question Papers Free for off line practice and view the Solutions online. For carrying out various activities, business requires money. 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. It is capable of further algebraic treatment. Interests on debentures is a debt and may be paid even out of capital. 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. 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. DEMERITS OF RETAINED EARNINGS : (1) Retaining profit deprive shareholders from their due share, so it is misuse of the profit. CLASS XI There will be two papers in the subject. Image: Payback period method – Formula, Merits, Demerits, Suitability. 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. Retained earnings. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion. The retained earnings are nothing but sacrifice of profits made by equity shareholders. Thus the assets are free to be used as mortgage in future, if need be. For the first time in INDIA, textbook in Economics, Accountancy & Business Studies with FREE Video Lectures by Eminent Authors/Subject Expert. Copyright © 2020 Applect Learning Systems Pvt. There are no expenses on prospectus, advertising etc.3. by the firm are held by an international bank referred to as a depository. Demerits: 1. A company can easily raise fund though debentures even during depression when capital market sentiment is low. Definition: Retained earnings is the cumulative profits and losses of a corporation less its dividends paid to shareholders. It was set up as a statutory corporation under Industrial Development Bank of India Act, 1964. The merits and demerits of harmonic mean are as follows: Merits: 1. Retained earnings carry positive connotation as compared to equity issue as far as stock market is concerned. Issue of shares : Issue of shares is the most important source of raising long-term finance. Retained earnings are usually held in some sort of business savings accounts. The amount which can be raised by way of retained earnings will be limited to an extent only. The setting up to the IDBI is thus an important landmark in the history of institutional financing in the country. Thus there are fewer administrative costs for deposits. (b) Loan capital: debentures. 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. 1. 3. Differentiate between Shares and Debentures. Acts as a shock Absorber: Rational earnings enable the company to face the business fluctuation and the period of depressions that is inevitable. Delhi - 110058. https://www.zigya.com/share/QlNFTjExMDA0Njcy. Retained Earnings. 4. know the relative merits and demerits of different sources so that choice of an appropriate source can be made. 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. 3. 2. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. (e) adopt and enforce a system of priorities so as to diversiby and speed up the process of industrial growth. Advertisement. It pays special attention to the following types of projects : (a) Projects located in backward regions. (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. 10:00 AM to 7:00 PM IST all days. (b) Projects promoted by new entrepreneurs and technocrats. The types of loans and services provided by banks vary from country to country. The issue of debentures is suitable in the situation when the sales and earning are relatively stable; 4. It is one of the units into which the share capital of a company can be divided. Debenture holders are creditors of the company. The maturity period is relatively short. Merits of Retained Earnings: I companies point of view: 1. Public deposits are unsecured. (e) Projects likely to meet growing demand for essential commodities. 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. This method is also known as pay out, pay off or recoupment period method. Merits and Demerits of Harmonic Mean. Also, deposits may be withdrawn whenever the depositors feel shaky about the financial health of the company. Retained earnings meaning, merits and – demerits. These claims are the GDRs and such shares are called depository shares. 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. (ii) Cheaper than External Equity. 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 … (iv) Positive Connotation. (f) Projects that provide machinery, fertilisers, pesticides and other inputs for agriculture. 4. The ICICI is a unique institution in several ways. 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. It was registered as a public limited company, not as a statutory corporation. ADRs are bought and sold in American markets like regular stocks. Merits and Demerits of Range. Finance, therefore, is called the … 1. Syllabus. It does not depend on the investors’ preference and market conditions. Interest paid on public deposits is tax deductible. (b) Stages of Formation of a Company. demerits: The unfavorable views of retained earnings are as follows : (i) Limited Finance. There is no fixed commitment to pay dividend on such funds. 1. 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