Limitations of Retained Earnings
Retained Earning has the following limitations:
- Dissatisfaction: In cases of excessive ploughing back of profits, i.e., where a major portion of the profits has been kept in the form of reserves, the shareholders might be disappointed by the lower amounts of dividends paid to them.
- Uncertainty: Retained earnings are a highly uncertain method of raising funds since the profits of a business are always fluctuating.
- Opportunity Cost: The opportunity cost associated with the usage of retained profits is often overlooked or sometimes, not even recognized by a lot of firms, which leads to sub-optimal usage of the funds.
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