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 Also, deposits may be withdrawn whenever the depositors feel shaky about the financial health of the company.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