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This a MCQ (Multiple Choice Question) based practice test of Chapter 9 - Financial Management of Business Studies of Class XII (12) for the quick revision/preparation of School Board examinations
Q The cheapest source of finance is:
- a)Preference share
- b)Retained earning
- c)Equity share capital
- d)Debenture
Correct answer is option 'B'. Can you explain this answer?
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Verified Answer
This a MCQ (Multiple Choice Question) based practice test of Chapter 9...
The cheapest source of finance is retained earnings. Retained income refers to that portion of net income or profits of an organisation that it retains after paying off dividends.
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This a MCQ (Multiple Choice Question) based practice test of Chapter 9...
Explanation:
Cheapest source of finance refers to the source of finance which involves minimum cost. In the context of finance, cost includes the rate of interest, dividend, commission, and other expenses that are incurred while raising funds.
Retained earnings are the profits that are reinvested in the business rather than being distributed to shareholders as dividends. It is considered the cheapest source of finance because it does not involve any explicit cost, unlike other sources of finance like debt and equity.
Let us understand why retained earnings are the cheapest source of finance:
1. No cost involved: Retained earnings do not involve any explicit cost, such as interest or dividend payment. Therefore, the company can use these funds without incurring any additional cost.
2. No dilution of ownership: When a company raises funds through equity shares or preference shares, it leads to the dilution of ownership. However, in the case of retained earnings, there is no dilution of ownership as the company is using its own profits to finance its growth.
3. No collateral required: When a company raises funds through debt, it requires collateral to secure the loan. However, in the case of retained earnings, there is no need for collateral as the company is using its own funds.
4. No restrictions: When a company raises funds through debt or equity, there are certain restrictions imposed by the lenders or shareholders. However, in the case of retained earnings, there are no such restrictions as the company is using its own funds.
Therefore, retained earnings are considered the cheapest source of finance as they do not involve any explicit cost, dilution of ownership, collateral requirements, or restrictions.
Cheapest source of finance refers to the source of finance which involves minimum cost. In the context of finance, cost includes the rate of interest, dividend, commission, and other expenses that are incurred while raising funds.
Retained earnings are the profits that are reinvested in the business rather than being distributed to shareholders as dividends. It is considered the cheapest source of finance because it does not involve any explicit cost, unlike other sources of finance like debt and equity.
Let us understand why retained earnings are the cheapest source of finance:
1. No cost involved: Retained earnings do not involve any explicit cost, such as interest or dividend payment. Therefore, the company can use these funds without incurring any additional cost.
2. No dilution of ownership: When a company raises funds through equity shares or preference shares, it leads to the dilution of ownership. However, in the case of retained earnings, there is no dilution of ownership as the company is using its own profits to finance its growth.
3. No collateral required: When a company raises funds through debt, it requires collateral to secure the loan. However, in the case of retained earnings, there is no need for collateral as the company is using its own funds.
4. No restrictions: When a company raises funds through debt or equity, there are certain restrictions imposed by the lenders or shareholders. However, in the case of retained earnings, there are no such restrictions as the company is using its own funds.
Therefore, retained earnings are considered the cheapest source of finance as they do not involve any explicit cost, dilution of ownership, collateral requirements, or restrictions.
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This a MCQ (Multiple Choice Question) based practice test of Chapter 9...
Cheapest source of earning is retained earning. Retained earning is also called General Reserve. It is the surplus profit of business. Business save this surplus earning for future..So that business can use it and they don't have the need to raise loans from others. Also business can expand using this surplus and business can use it when they need it..So it is the cheapest source of finance.
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This a MCQ (Multiple Choice Question) based practice test of Chapter 9- Financial Management of Business Studies of Class XII (12) for the quick revision/preparation of School Board examinationsQ The cheapest source of finance is:a)Preference shareb)Retained earningc)Equity share capitald)DebentureCorrect answer is option 'B'. Can you explain this answer?
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