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how reserves can be utilised for financing ???

CA Abhishek Singh (practice) (2106 Points)

15 December 2010

i was solving one the problems of "cost of capital" topic.

question was relating for an investment which will cost Rs.10 crores and it will be financed by following

1. Equity share Rs.5cr.

2. Debentures Rs.3cr

3. Retained Earnings Rs.2cr

MY Question : as far as my knowledge is concerned reserves and surplues is the retention of profits which is differeent from cash. so how reserves can be used for fianancing.

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2 Replies

Harie (student) (148 Points)
Replied 15 December 2010

Hi Abishek :)

Earning after equity dividend are called Retained earning and this is after transfer to general reserve as per company act. As for me these are in the form of cash and are available for Investment and cost of retained earning are Ke

Regards,

Harie

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SUDHIR & PRADEEP JI (CA FINAL+LLB + DISA) (2299 Points)
Replied 15 December 2010

Dear Abhishek

Yes, dr you are right that the Retanied Earnings are the part of Profit, & it is different from cash...

but both are not opposite things, we can say that the profit earn during the year in relation to some extent cash. which means that the part of profit we transfered to retained earning has to be, cash in nature, which indicate that the cash or cash equlivaent balance in your balance sheet has some part of cash as retanied earning...