Mehta Corporation, a company dealing in electronics is planning to expand their business on account of growing demand of consumers? electronics. So the company requires additional funds. The finance manager Mansi reported that company is not in a position to bear extra burden of explicit cost and equity share holders insisted not to issue more shares as there is risk of losing control. On the basis of the given information about Mehta Corporation answer the following questions:
(a) Suggest a source of owners fund most suitable for the company.
(b) State any two merits of source of fund chosen in part (a) above.

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Solution

Dear Student,

(a) On the basis of the given information, 'retained earnings' is the most suitable source of finance for the company.

(b) Merits of Retained Earnings:

The use of retained earnings eliminates the cost of issuing external equity and also removes the losses incurred on under-pricing.

There will be no dilution of control and ownership when the retained earnings are used.

Regards

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