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unit-5-methods-of-raising-finance

Unit-5 Methods Of Raising Finance

In this unit you will learn why finance is needed, what the sources of finance and the methods of raising finance.

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What are the advantages of raising capital through borrowings?

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Learning Pundits Content Team

Written on Jun 24, 2019 4:08:41 PM

If the business is profitable, interest being a fixed charge, the return of owners' investment is much higher. Suppose total investment in a business is Rs. 1 lakh out of which owners have contributed Rs. 40,000 and loans have been raised for the balance of Rs. 60,000 at 15% interest per annum. The profit earned during the year is Rs. 30,000. In this case, the total amount of interest payable is Rs. 9,000. So profits after interest payment will amount to Rs. 21,000. Let us assume that tax is payable on profits at the rate of 50%. So, tax to be paid amount to Rs. 10,500. Net .profit after tax will thus be Rs. 10,500. What will be the return on owner's capital? It will be Rs. 10,500 on their investment of Rs. 40,000 that is, 26.25%.