INTRODUCTION
This Project will discuss about the business finance that is to be chosen in Printers limited which is private limited company that is owned by the three Family shareholders who are also the directors of the company. The company has currently funded the finance of the company from a long term loan acquired from the bank. But now it has been observed that the company requires more fund for expanding the operations of the business and for that purpose the company requires to finance more funds. According to the financial statements of the company it has been observed that the company has improved its profitability with the increase in the revenues and liquidity ratios and profit margins.( Gitman, Juchau, and Flanagan,2015) This means that company has a stable earnings in the future and hence it can choose Debt finance for funding the additional requirements of the company as it is less costly then equity financing.
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PART A
1.1: Retained earnings
Retained earnings are basically the earnings of the company earned to date that is retained by the company and not distributed among the shareholders so that the company can utilise the funds in case they require it in future. The Earnings are retained by the company so that they can invest those earnings in the projects or in the research and developments process that will indirectly increase the wealth of the shareholders of the company. Retained earning are reported in the balance sheet of the company under shareholder's equity net of dividend paid. The calculation of retained earnings are done as below:
Retained earnings= Beginning retained earnings+ Net income – Dividends, which is also called as the retention ratio or retained surplus.( Espenlaub, Khurshed, and Mohamed,2012)
1.2: Advantages and disadvantages associated with retained earnings
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Advantages |
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1. The retained earnings are the profits of the company hence there is no requirement to pay interest or any other payment on retained earnings. |
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2. The retained earnings can be easily used by the company as these are owners funds. |
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3. There is no issue or transaction cost on issue, in case of retained earnings. |
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4. There is no control on use of retained earnings. |
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Disadvantages: |
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1. The funds that are issued by the retained earnings are limited. |
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2. The opportunity cost that is associated with the retained earnings are very high. |
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3. New companies does not have retained earnings, so they can not rely on this source of |
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