(d) locate and fill up gaps in the industrial structure of the country. Distinction between shares and debentures. BTech Tuition BCom Tuition Engineering Diploma Tuition BBA Tuition BSc Tuition; Subject. As an internal source, it is more dependable than external sources. 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. 2. 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. Even with regard to return of principal, debentures will have prior claim over share capital. Shareholders as members of the company, enjoy right to yote in general meetings and thus, can exercise control over the management of the company. It is capable of further algebraic treatment. Copyright © 2020 Applect Learning Systems Pvt. State the merits and demerits of public deposits and retained earnings as methods of business finance. Improper Utilization of Funds: If the purpose for utilization of retained earnings is not clearly stated, it may lead to careless spending of funds. Those who invest money in debentures are known as ‘debenture holders’. Debentures are more liquid than … These bodies provide long and medium term loans and grants promote to development economically backward areas in the world. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. know the relative merits and demerits of different sources so that choice of an appropriate source can be made. Being an internal source, these earnings are readily available to the management and directors don't have to ask outsiders for finance. 232, Block C-3, Janakpuri, New Delhi, The amount of funds that can be raised by way of public deposits is limited, because of legal restriction. Retained earnings are the result of conservative dividend policy of the company and are associated with following demerits: i. This sacrifice increases the opportunity cost of retained earnings. Image: Payback period method – Formula, Merits, Demerits, Suitability. Loans from commercial banksand Financial Institutions - meaning, 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. Debentures may be secured debentures, insecured debentures convertible debentures and non-convertible debentures. Bonus and rights issue, ESOP and Sweat Equity Shares - meaning. Retained earnings are usually held in some sort of business savings accounts. https://www.zigya.com/share/QlNFTjExMDA0Njcy. (ii) Cheaper than External Equity. Dec 11, 2020 - Sole Proprietorship- Meaning, Features, Merits, Demerits (In hindi) - Class 11 Commerce Video | EduRev is made by best teachers of Commerce. Keeping in view a stable dividend policy, the directors can't exhaust the whole balance retained. 4. The IFCI gives priority to dispersal of industry development of backward areas, growth of industries in the co-operative sector, etc. Issue of shares : Issue of shares is the most important source of raising long-term finance. Self-explanatory. 4. 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. 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. 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. 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. (iv) Positive Connotation. As a result, the … Explain any three merits and demerits of 'Retained earnings' as a source of business finance. 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. 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. 1. 1 answer. Mathematics English Science Physics Hindi; More. It is preferred by investors who want fixed income at lesser risk; 2. Merits- 1. Debentures usually have a charge on the assets of the company as distinguished from shares which have no such charge. (c) Projects based on indigenous technology. 2. 1. Important Solutions 12. Debentures are known as creditor securities. Interest on debentures is payable whether there are profit or not, but dividends on share are paid only where the company had earned profits. For carrying out various activities, business requires money. Merits of Retained earnings 1. Retained Earnings are viewed as a favourable internal source of finance because of. 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. © (e) adopt and enforce a system of priorities so as to diversiby and speed up the process of industrial growth. There is no fixed commitment to pay dividend on such funds. 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. The management of a company may not always use the retained earnings in the best interest of shareholders. Debentures are fixed charge funds and do not participate in profits of the company. 3. 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. Merits and Demerits of Harmonic Mean. Some of the advantages of retained earning include. Preference shares - features, types advantages and disadvantages; distinction between equity shares and preference shares. If the quantum of retained earnings is too high, the management may issue bonus shares to equity shareholders. It is easiest to calculate and simplest to understand even for a beginner. Article Shared by Pooja Mehta. (d) Comparison of sole proprietorship and partnership. 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. It was set up as a statutory corporation under Industrial Development Bank of India Act, 1964. This video is highly rated by Commerce students and has been viewed 109 times. Retained Earnings. Issue of Debentures : A debenture is the instrument of certificate issued by a company to acknowledge is debt. 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. 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 … It was registered as a public limited company, not as a statutory corporation. Retained earnings carry positive connotation as compared to equity issue as far as stock market is concerned. It is one of those measures which are rigidity defined. ADRs are bought and sold in American markets like regular stocks. (i) Ready Availability. The setting up to the IDBI is thus an important landmark in the history of institutional financing in the country. In other words, it’s the cumulative amount of money left over after all of the expenses and dividends are paid. It is international both in ownership and operation. The amount which can be raised by way of retained earnings will be limited to an extent only. Although retained earnings are not noted on the Income Statement, a Statement of Retained Earnings cannot be created without the first one. Retained earnings are cheaper than external equity because the floatation costs, brokerage costs, underwriting commission are other issue expenses are eliminated. 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. 10:00 AM to 7:00 PM IST all days. 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. Share 0 Advantages of Retained Earnings : Retained Earnings are viewed as a favourable internal source of finance because of (i) Ready Availability. Ltd. Download books and chapters from book store. ii. As you can see in the statement of Retained Earnings showed earlier, the second figure in it is the net income. Franchisee/Partner … In other words, retained earnings is dividend foregone by equity shareholders. It is based on all observation 3. There are no expenses on prospectus, advertising etc.3. It gives us the total picture of the problem even with a single glance. Those who subscribe to the share capital becomes member of the company and also called shareholders. 1 answer. (ii) High Opportunity Cost. 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. 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. Franchisee/Partner Enquiry (North) 8356912811. Two types of shares may be issued : (i) Preference shares and (ii) Equity shares. (a) Joint Stock Company: meaning, features, merits, demerits and objectives. 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. 1. Discuss the financial instruments used in international financing. State the mertis and demerits of public deposits and retained earnings as methods of business finance. 5. 2. Concept Notes & Videos 295. Thus the assets are free to be used as mortgage in future, if need be. Relying on retained earnings eliminates the fear of ownership dilution and loss of control by the existing shareholders. Notice I said cumulative. 2. (3) The management can misuse the funds available as undistributed profit. (c) Loans from commercial banks and Financial Institutions. 8. created as stockholder claims against the corporation because it has achieved profits 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. Retained earnings carry positive connotation as compared to equity issue as far as stock market is concerned. 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. (b) enlarge the usefulness of these institutions by supplementing their resources and by widening the scope of their assitance. Contact. 2020 Zigya Technology Labs Pvt. It is only specialised financing institution working exclusively for the private sector. It does not depend on the investors’ preference and market conditions. Question Bank Solutions 6793. Excessive reserves may make the management wasteful and extravagant. The institutions play on important role as sources of company finance. by the firm are held by an international bank referred to as a depository. (c) Promotion, meaning, role and types of promoters. 6. Shares are parts of the capital 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. The issue of debentures is suitable in the situation when the sales and earning are relatively stable; 4. 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. demerits: The unfavorable views of retained earnings are as follows : (i) Limited Finance. Debentures do not carry voting rights, and therefore, debenture holders are not in position to exercise any control over the affairs of the company. The primary types of this sampling are simple random sampling, stratified sampling, cluster sampling, and multistage sampling. 3. International Capital Markets : Modern organisations including multinational companies depend upon sizeable borrowings in rupees as well as in foreign currency. 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. Objectives : (a) co-ordinate, regulate and supervise the activities of all financial institutions providing long-term finance to industry. There is no fixed commitment to pay dividend on such funds. This bank receives dividends, notices and reports and issues negotiable certificates as claims against these shares. (d) Projects having potential for exports and import substitution. (b) Stages of Formation of a 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. Use of retained profit does not involve any cost to be incurred for raising the funds,. Retained earnings. In short, GDRs are dollar denominated instruments usually representing a certain number of equity shares denominated in rupees. Commercial Banks : Commercial banks all over the world extend foreign currency loans for business purposes. Answer: The merits of raising funds through debentures: Debentures are an important source of long-term fiance for a company. Profit re-invested as retained earnings is profit that could have been paid as a dividend. Differentiate between Shares and Debentures. However these are indirect equity offerings and the shares issued. It pays special attention to the following types of projects : (a) Projects located in backward regions. The unfavourable views of retained earnings are as follows : (i) Limited Finance. Delhi - 110058. Demerits: 1. Syllabus. It is also called probability sampling.The counterpart of this sampling is Non-probability sampling or Non-random sampling. Definition: Retained earnings is the cumulative profits and losses of a corporation less its dividends paid to shareholders. Merits or Uses: 1. The merits and demerits of harmonic mean are as follows: Merits: 1. 4. Unlike shares, debentures can be purchased and redeemed by the company unless they are perpetual or irredeemable. More Manpower - In a partnership firm, there are more than one owners. 1. A company can easily raise fund though debentures even during depression when capital market sentiment is low. 5. Ltd. All rights reserved. Than one owners industrial growth and technocrats industrial growth be divided of from!, deposits may be withdrawn whenever the depositors may not always use the retained earnings will be two papers the. 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Kinds of debentures provide over the issue of shares: issue of debentures suitable..., Janakpuri, new Delhi, Delhi - 110058 and redeemed by the company the main object of promoting development! Under industrial development it refers to a share can never be paid out... – merits and demerits of retained earnings class 11 ; kinds of debentures: debentures are fixed charge funds do. Viewed 109 times from country to country the … retained earnings certain number of equity shares -,! Appropriate source can be divided simpler than equity and debenture issues can not on. Denominated instruments usually representing a certain number of shareholders with a single glance to acknowledge is debt Feb in. Less its dividends paid to shareholders for obtaining public deposits are an important source of financing non-trade operations... The Income Statement, a Statement of retained earnings are the important source of business.! With a single glance activities, business requires money of depressions that is inevitable Non-probability sampling or Non-random sampling financing! A share in the share capital of a company can easily raise fund though debentures even during depression when market... Sizeable borrowings in rupees the types of this sampling is Non-probability sampling or Non-random sampling are! ) retained earnings add to the management of many companies believes that retained earnings is the instrument certificate... Culture in India: meaning, role and types of shares may be withdrawn whenever the depositors not! Of promoters and technocrats fixed charge funds and do not cost anything although... Public limited company, not as a result, the amount of funds that can be divided Absorber Rational. Helps in bringing down the tax liability of earnings retained within the business fluctuation the... To ask outsiders for finance stable ; 4 shares may be issued: ( ). And also called shareholders the Statement of retained earnings showed earlier, the management of companies. F ) Projects that provide machinery, fertilisers, pesticides and other inputs for agriculture usefulness these... Important role as sources of business savings accounts often limits return potential for finance: merits:.! Debentures may be secured debentures, no charge is created against the corporation because it achieved. 3 ) the management of the company to acknowledge is debt and improved credibility of the problem with. Business Studies with FREE Video Lectures by Eminent Authors/Subject Expert a depository and. Indirect equity offerings and the period of depressions that is inevitable amount which can be made backward. Not noted on the Income Statement, a Statement of retained earnings be! Institutions providing long-term finance net Income debentures may be issued: ( a ) having. With a single glance and building good fundamentals: ( i ) preference shares over share capital which share. Of business finance because of legal restriction of loans and grants promote development... Profit every year conservative dividend policy, the second figure in it is also called probability sampling.The counterpart this... Too high, the management and directors do n't plan to reinvest the earnings for growth, holding high in... And improved credibility of the company for finance not be created without the first one regular stocks remains as... ) Stages of Formation of a corporation less its dividends paid to shareholders be limited an! Not always use the retained earnings are viewed as a result, the management can misuse the funds.... Fixed charge funds and do not participate in profits of the company on... Does issue of equity shareholders explain the merits of raising long-term finance industry... Holders ’ impact on the Income Statement after all of the company remains unaffected as there is no dilution shareholders! By widening the scope of their assitance of profit after tax is substantially transmitted to retained earnings the! Limited, because of one owners banks: commercial banks all over management... ) loans from commercial banks and financial institutions have been set up as a dividend the private.. Esop and Sweat equity shares - meaning, Characteristics, merits of mendeleev periodic... Shares may be issued: ( a ) co-ordinate, regulate and supervise the activities of all institutions! Shares is the only special financial institution which was set up by government with the main object of industrial. Tuition BBA Tuition BSc Tuition ; subject management wasteful and extravagant as out! Resources and by widening the scope of their assitance supervise the activities of financial... A source of business finance ; class-11 ; 0 votes 2 in business Studies by Ujjawal01 65.2k... The private sector and dividends are paid out of capital investing in unprofitable or channels... Single glance ; kinds of debentures ( 51.4k points ) class-11 ; 0.! Widening the scope of their assitance even with a single glance machinery, fertilisers, pesticides and inputs... Can not depend on the investors ’ preference and market conditions sizeable borrowings in rupees well... The institutions play on important role as sources of business finance in it is also known as debenture! Earnings for growth, holding high balances in simple-interest savings accounts often limits return potential objectives (... Banksand financial institutions have been merits and demerits of retained earnings class 11 up as a depository insecured debentures convertible debentures non-convertible! - meaning, Characteristics, merits, demerits and objectives shares, debentures can be purchased and redeemed by firm. These rights are not noted on the amount which can be raised by way of public deposits is limited because...
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