Explain any five merits of ‘retained earnings’ as a ’ source of finance.
OR
’As a source of finance, retained earnings is better than other sources’. Write five reasons to support this statement.
Merits : The merits of retained earning as a source of finance are as follows :
- Retained earnings are a permanent source of funds available to an organisation.
- It does not involve any explicit cost in the form of interest, dividend or floatation cost.
- As the funds are generated internally, there is a greater degree of operational freedom and flexibility.
- It enhances the capacity of the business to absorb unexpected losses.
- It may lead to increase in the market price of the equity shares of a company.