Question

"As a source of finance retained earnings is better than other sources". Do you agree ? Give reasons for your answer.

Answer 1

Yes, Retained Earnings are better than other sources of finance because :

(i) Retained earnings are a permanent source of funds available to an organization.

(ii) It does not involve any explicit cost in the form of interest, dividend or floatation cost.

(iii) As the funds are generated internally, there is a greater degree of operational freedom and flexibility.

(iv) It enhances the capacity of the business to absorb unexpected losses.

(v) It may lead to increase in the market price of the equity shares of a company