Q12. Vibrant Ltd is a reputed garments manufacturing unit. The company requires funds for short term in order to meet the additional demands during festival season. The owner approaches the supplier of the raw materials to give credit for two months, so that he can get cloth for making garments without making immediate payment. The supplier makes an enquiry regarding the business organization and finds that its reputation is very good. So it extends two months credit to it.
i Identify the source of finance discussed above and explain any two advantages of the same.
i. Describe any two limitations of retained eamings, as a source of finance.
Answers
Answer: (I).loan(Short term borrowed capital)
Advantages-
1. Shorter time for incurring interest
As short term loans need to be paid off within about a year, there are lower total interest payments. Compared to long term loans, the amount of interest paid is significantly less.
2. Easier to acquire
Short term loans are the lifesavers of smaller businesses or individuals who suffer from less than stellar credit scores. The requirements for such loans are generally easier to meet, in part because such loans are usually for relatively small amounts, as compared to the amount of money usually borrowed on a long term basis.
(II) a.Lower Rate of Dividend: Retained earnings do not allow shareholders to enjoy full benefit of the actual earnings of the company. b.This creates not only dissatisfaction among the shareholders but also adversely affect the market value of shares.
Explanation: