Thursday, 22 January 2015

What are retained Earning

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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