Question

Rex Entertainment is a popular film entertainment company. keeping in view the growing culture of multiplex, its owners have decided to make some changes in the interiors like creating a lounge area, installing more effective sound system etc. The company wants to raise the required fund for a period of more than one year but less than five years. In context of above case. i) Identify and explain the types of funds company seek to raise on the basis of time period. ii) State one merit and one demerit of that source

Answer 1

Answer:

Explanation:

Answer:

Public Deposits are the type of funds that Rex Cinemas seeks to raise on the basis of time time period

Explanation:

Public deposits are a very convenient source of business finance. No cumbersome legal formalities are involved. The company raising deposits has to simply give an advertisement and issue a receipt to each depositor.

2. Economy:

Interest paid on public deposits is lower than that paid on debentures and bank loans. Moreover, no underwriting commission, brokerage, etc. has to be paid. Interest paid on public deposits is tax deductible which reduces tax liability. Therefore, public deposits are a cheaper source of finance.

3. No Charge on Assets:

Public deposits are unsecured and, therefore, do not create any charge or mortgage on the company’s assets. The company can raise loans in future against the security of its assets.

4. Flexibility:

Public deposits can be raised during the season to buy raw materials in bulk and for other short-term needs. They can be returned when the need is over. Therefore, public deposits introduce flexibility in the company’s financial structure.

5. Trading on Equity:

Interest on public deposits is paid at a fixed rate. This enables a company to declare higher rates of dividend to equity shareholders during periods of good earnings.

6. No Dilution of Control:

There is no dilution of shareholders’ control because the depositors have no voting

7. Wide Contacts:

Public deposits enable a company to build up contacts with a wider public. These contacts prove helpful in the sale of shares and debentures in future.