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Question
Justify the following statement.
Retained earning is simple and cheapest method of raising finance.
Solution
Justification:
- Retained earnings are the earnings of the company which are retained (reinvested) in the business.
- The sum of those profits accumulated over years is re-invested in the business, rather than distributing it as a dividend to shareholders.
- The company can utilize such reserves for financing various projects such as expansion, diversification, etc.
- It is an important source of internal financing. Thus, it is also known as 'Self Financing' or 'Ploughing Back of Profits'.
Thus, it is rightly justified that, retained earnings is the simple and cheapest method of raising finance.
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