Business Studies

Sources of Business Finance

Question:

What are retained profits? Discuss their advantages and disadvantages.

Answer:

Retained Profits: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Profit re-invested as retained earnings is profit that could have been paid as a dividend. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. The dividend policy of the company is in practice determined by the directors. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. The use of retained earnings as opposed to new shares or debentures avoids issue costs. The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares. Another factor that may be of importance is the financial and taxation position of the company’s shareholders. For example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, and then finance through retained earnings would be preferred to other methods.
Advantages of Retained Earnings

  • The management of many companies believe that retained earnings are funds which do not cost anything, although this is not true. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash.
  • The dividend policy of the company is in practice determined by the directors. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders.
  • The use of retained earnings as opposed to new shares or debentures avoids issue costs.
  • The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares.
  •  Another factor that may be of importance is the financial and taxation position of the company’s shareholders. If, for example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, then finance through retained earnings would be preferred to other methods.

Disadvantages of Retained Earnings

  • A company must restrict its self-financing through retained profits because shareholders should be paid a reasonable dividend, in line with realistic expectations, even if the directors would rather keep the funds for re-investing.
  • At the same time, a company that is looking for extra funds will not be expected by investors (such as banks) to pay generous dividends, nor over-generous salaries to owner-directors.
  • Scope of retained earnings is limited by amount of profits. A loss incurring firm has no source called retained earnings.
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Sources of Business Finance

Q 1.

Write a note on international sources of finance.

Q 2.

What is a commercial paper? What are its advantages and limitations?

Q 3.

Name two sources of funds under owner's fund.

Q 4.

What is factoring?

Q 5.

In leasing agreement what right is given to lessee?

Q 6.

Explain in detail the types of debenture a company can issue.

Q 7.

Which deposits are directly raised from the public?

Q 8.

Why does business enterprise need finance?

Q 9.

Explain trade credit and bank credit as sources of short term finance for business enterprises.

Q 10.

Differentiate between a share and a debenture.

Q 11.

What advantage does issue of debentures provide over the issue of equity shares?

Q 12.

State two factors affecting the working capital requirement of a firm.

Q 13.

What is business finance? Why do businesses need funds? Explain.

Q 14.

Specify the objective of I.D.B.I.

Q 15.

What is lease financing? Discuss its merits and demerits.

Q 16.

Give the full form of GDR and ADR.

Q 17.

Discuss the financial instruments used in international financing.

Q 18.

What is factoring? Discuss its pros and cons.

Q 19.

Why is equity share capital called Risk Capital'?

Q 20.

Who regulates the acceptance of public deposits?

Q 21.

What do you mean by discounting of bills of exchange?

Q 22.

State the meaning of finance. What factors determine working capital and fixed capital requirements of a business?

Q 23.

Preference shares are preferred by company but not by investors. Why?

Q 24.

Name any three special financial institutions and state their objectives.

Q 25.

What are Indian depository receipts (IDRs)?

Q 26.

What are public deposits?

Q 27.

Why preferences are given to preferential shares?

Q 28.

State various sources of short and medium term funds.

Q 29.

What is the status of debenture holders?

Q 30.

Describe in brief the features of equity shares.

Q 31.

Explain different types of preference shares which can be issued by a company.

Q 32.

Name zones of the Lessors and Lessees in India.

Q 33.

Retained earnings are not a good source from the values point of view as it is the right of equity shareholders. Do you agree? Justify your answer.

Q 34.

Mr. John has ? 1,00,000 for investment purposes. Should he invest in equity shares, preference shares, public deposits or debentures? Justify your answer.

Q 35.

What are the two important functions of factors?

Q 36.

Who are called the owners of a company?

Q 37.

What are the preferences given to preference shareholders?

Q 38.

State two factors affecting the fixed capital requirement of a firm.

Q 39.

What preferential rights are enjoyed by preference shareholders? Explain.

Q 40.

What are retained profits? Discuss their advantages and disadvantages.

Q 41.

What is a trade credit?

Q 42.

What is debenture?

Q 43.

Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.

Q 44.

Describe briefly the factors responsible for selecting a source of finance.

Q 45.

List sources of raising long-term and short term finance.

Q 46.

Preference shares are not suitable for which kind of investors?

Q 47.

As a source of finance retained profit is better than other sources. Do you agree with this view? Give reasons for your answer.

Q 48.

Write a short note on the features of GDRs.

Q 49.

State the merits and demerits of public deposits and retained earnings as methods of business finance.

Q 50.

State various sources of long term funds.