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