What are retained Earning
Retained
earnings are the profit of the company which is not distributed to the shareholder.
Share Capital
|
$ 100,000
|
Retained Earning
|
$ 20,000
|
Total equity
|
$ 120,000
|
What is the purpose of retained earning?
The retained
earnings are used as source of finance. Retained earnings are shown in the
balance sheet as part of capital. Retained earnings also result in dividend
growth.
Why retained earnings are used as source of
financing
There
are number of reason for using the retained earnings as source of financing
which includes i.e avoid new issue cost, avoid new issue legal formalities , and
new issue is a time consuming job.
What are new issue costs?
There
are number of cost involved in new issue like legal charges for legal issue,
newspaper advertisement for new issue of share, printing and stationary cost
etc.
How the dividend growth is calculated?
The
dividend growth is calculated by following formula
Growth
= Proportion of retention x Rate of return on investment
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