Q.Describe the merits and demerits of public deposits and retained earnings as systems of commercial (business) finance.

Public deposits are cheap and simple but risky and limited; retained earnings cost nothing externally but reduce what shareholders receive and depend on the firm already being profitable.

Public Deposits — deposits taken directly from the public/shareholders for a fixed period at a fixed rate of interest.

• Merits: simple procedure (no collateral security needed), often cheaper than bank borrowing, no dilution of ownership/control.
• Demerits: not a reliable source for new or small companies without an established reputation, cannot raise very large sums this way, and over-reliance can create liquidity risk at maturity.

Retained Earnings (ploughing back of profits) — reinvesting a part of the company's own undistributed profit rather than paying it all out as dividend.

• Merits: a permanent, cost-free (no interest/dividend obligation) source of finance, strengthens the company's capacity to face loss, and does not dilute ownership or control. …