Question

What are the two advantages of ‘ploughing back’ of profits?

Discuss five merits of retained earnings.

Discuss any four advantages of ploughing back of profits from the company’s points of view.

State two advantages of ploughing back of profits.

Answer 1

1. It is the easiest and most cost-effective method of financing. There are no legal procedures to follow, and no negotiations are required. Since no return needs to be paid on retained earnings, the company incurs no fixed liabilities.
2. The company’s financial structure remains completely flexible. There is no encumbrance on its assets, and the management’s ability to raise additional funds by issuing new securities in the market is unrestricted.
3. Retained earnings strengthen a company’s financial position and improve its creditworthiness. With substantial reserves, a company can tackle unexpected challenges and economic fluctuations more easily and cost-effectively. Moreover, retained profits enhance the company’s ability to borrow when needed.
4. Retained earnings can be utilised for repaying debts and replacing outdated assets. A company with substantial reserves is well-positioned to capitalise on business opportunities as they arise.
5. Reserves accumulated through retained earnings can be used to maintain stable dividend payments on equity shares. Consistent dividends help foster better relationships with shareholders.
6. Using retained earnings does not affect the company’s voting control.
7. The company can proceed with its expansion, growth, and modernisation plans without being concerned about the state of the capital market.