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(iv) It enhances the capacity of the business to absorb unexpected losses;
(v) It may lead to increase in the market price of the equity shares of a company.
Limitations of Retained Earnings
Retained earnings as a source of funds has the following limitations:
(i) Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would
get lower dividends;
(ii) It is an uncertain source of funds as the profits of business are fluctuating;
(iii) The opportunity cost associated with these funds is not recognised by many firms. This may
lead to sub-optimal use of the funds.
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