Question

merits and demerits of public deposits and retained earnings as
methods of business finance.[8 marks]

Answer 1

Answer:

The merits and demerits of public deposits and retained earnings as methods of business finance are :

Merits of Public Deposits:

1. Generally the rate of interest on public deposit is higher than the rate of bank interest . As such it gives more income to investors.
2. Public deposits are protected in light of the fact that the organization trying to construct its reputation satisfies its commitments. Deposits are commonly made with the regional industries which bring about their development and advancement.
3. Public store is the basic strategy where the public deposits at their own will. It requires the least desk work, printing and correspondence

Demerits of Public Deposits:

1. The public deposit as a source of financing isn't beneficial. Contributors are offered choice to pull back cash whenever by giving short term notice.
2. The administration of the organization may get into speculation and over exchanging with the excess funds effectively produced through public deposits.
3. The public deposits are not secure about as no assets are charge against them.
4. There is no voting rights that has been guaranteed to the depositors so that they can participate in the management.

Merits of Retained Earnings:

1. Company is under no obligation to pay dividend on such funds.
2. Retained earnings constitue the profit earned by the company therefore, it helps maintaining the financial position of the company strong.
3. Use of such earnings do not require any cost to be incurred for raising them. There is no expense incurred on it.
4. There is no charge created against the assets the way it is created on debentures and no restrictions are on the management.

Demerits of Retained Earnings:

1. Retaining earnings deprive shareholders from their due share, so it is misuse of the profit.
2. There is always danger of over capitalisation, if the company goes on retaining profit every year.
3. The management can misuse the funds available as undistributed profit.